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

Net Worth Statement - A Reality Check

Some of us like to think that we are rich. Most of us like to pretend that we are rich. Unfortunately only few of us are truly rich.

Under normal circumstances, I would applaud positive thinking. When it comes to “bread and butter” matters however, I prefer to know the truth no matter how scary or painful it is.

Malaysia is a rich country and Malaysians are generally living well. So it is not surprising if most of us think that we are rich. Nobody will die out of hunger in Malaysia. People actually queue up to buy $20 popcorn!

Some will not even think twice about paying $15 for a glass of cold drink. The children are even using sophisticated smart phones and are seen carrying tablets everywhere!

I may sound a bit sarcastic but please do not get me wrong, I am not against consumerism. In fact I think consumerism breeds innovation. I am also a believer of an adage "money not spent is not yours".

So feel free to spend your money in any way you deemed fit. Contribute to the well being of the economy!

The key word however is "your money". Is it really your money that you are spending? With easy credit on offer, the distinction can get a bit hazy sometimes.

This is where your Net Worth statement can give you a bit of reality check.

Net Worth statement is the balance sheet of your finance life.

Recap:
Assets - Liabilities = Net Worth
Assets - Liabilities > 0 = Technically Rich
Assets - Liabilities < 0 = Technically Bankrupt

Since this is just a reality check, you don't have to update it every month. You can if you want to though. In my case, I just monitor my net worth position as at the end of the year, 31 December.

I also have Projected Net Worth statement. For a beginner, this may be quite complicated because it involves estimation of your future assets and liabilities. This is where your Excel skills will come in handy.

If you are a novice, maybe you can start with just monitoring your actual net worth position every six month. Once you are more familiar with it then you can start doing the Projected Net Worth.

Below is a sample of Net Worth statement:

 

Please note that for properties, I will just list them at cost price instead of market price. I would rather err on the prudent side.

It is better to underestimate your net worth. Not too much though, it might de-motivate you.

If you are even stricter than me, you can even take out your retirement fund from your asset list since it is not accessible until you have legally retired.

Homework: If you haven't already, start to prepare your Net Worth statement. This exercise might take some time to complete because you will need statements from the banks regarding the actual value of your investments or loans as at (in my case) 31 Dec.

Do not give up. The truth will set you free.

Good luck!