Cash Flow Planning - Do or Die

I know that the title is a bit melodramatic. I cannot emphasize enough that Cash Flow Planning is vital to your plan to achieve Financial Freedom.

It is the only thing that can help you maneuver the interesting world of personal finance without being blind sided.

There must be a good reason why companies and countries have a formal budget exercise year in year out without fail. Whether you like it or not "money makes the world go around". If you don't manage your money, your money (more like lack of it) will manage you. So be warned.

Your personal cash flow planning doesn't need to be complicated. It requires only two tabs in Excel spreadsheet:

• Actual Income vs Actual Expenditure
• Projected Income vs Projected Expenditure

How simple is that?


Actual Income vs Actual Expenditure is for you to record your actual income and expense for the year. It should be split by month. This will show you which month you have surplus and which month you are in trouble!

You must always tally this statement to your salary (main) bank account statement. In the sample below $23 [column: Total, row: Surplus/(Deficit)] is the balance of the bank account at the end of the year.

 

Projected Income vs Projected Expenditure statement should look exactly like the actual statement. The differences are only the years (future years) and the value (projected instead of actual).

To make sure that you got all the projected income and expenses in the statement, refer to your assets and liabilities list. Your assets will generate you income and likewise your liabilities will be translated to expenses.

I recommend that you should plan for a minimum of 5 years. It would be fabulous if you can do your projected income and expenditure until your retirement age.

Though not necessary but it will prompt you to think of your lifestyle post retirement. Will it be a relaxing one or fraught with money worries?

The beauty of planning ahead is you have plenty of time to fix the situation if you don't like the outcome of your "crystal ball". Take action now for a better tomorrow.

With the above two statements, you will know exactly when your passive income exceeds your expenditure and the right time to tender your resignation!

I have a friend who was so scared to buy a house. Keep on saying that he couldn't afford it. That is until he did his cash flow planning and found out that he can actually afford more than one!

To err on the prudent side maybe foolish but not too bad. It is even more tragic if you think you can afford it but in truth you can't. Cash flow planning will *zap* you back to reality in no time!

Homework: If you haven't already, start doing your cash flow planning today!

Remember that taking action separates people who are committed to be rich from people who are only dreaming of striking it rich.

Recap:
Income - Expenses > 0 = Surplus Cash
Income - Expenses = 0 = You Are In Trouble
Income - Expenses < 0 = You Are In Double Trouble

Passive Income - Expenses > 0 = Financial Freedom
Passive Income - Expenses < 0 = You Will Need To Work Till You Die