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3 Reasons to Focus on Household Cash Flow
| January 4, 2012 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Cash flow matters. In fact, cash flow is one of the most important principles in personal finance. Business trainer Brain Tracy says that 46% of businesses fail due to poor cost containment. Similarly, many homes have fallen victim to cash flow problems due to illness, lifestyle inflation, misplaced altruism, and poor money management (simply not paying attention). The sad truth is a whopping 62% of people live paycheck to paycheck. There is clearly a significant disconnect between our knowing the importance of cash flow and our actions. Here are three reasons for a renewed focus on cash flow.
Cash Flow Is Important to Capitalize on Unique Opportunities
Last year, I had the pleasure of seeing how a successful venture capitalist (VC) structured his personal finances. Since he’s in the business of assessing and funding the latest and greatest opportunities, I was curious to see if he was a risk junkie like many other Wall Street types (he’s a former ex-Morgan Stanley managing director). Surprisingly, he only devoted 10% of his personal income towards “speculative” investments. He had profound insights pertaining to personal and professional risks. For one thing, he repeatedly stressed the importance of positioning oneself to take professional risks. He indicated how he never could have made the leap from employee to owner of his own VC firm without a solid financial foundation. For him, appreciation of acquired assets was his business’s bread and butter, but without proper cash flow management, he wouldn’t be able to wait out long periods for massive paydays.
He also indicated that one of the things that he personally looks at when he is fostering new business relationships is financial statements. He called it “due diligence” to intimately know all the financial details of everyone he is doing business with, as much as allowable, and invited anyone to do the same with him. He stated that there were plenty of people who he turned down because they were “too leveraged” and thought that he would personally be financing their lifestyles rather than thriving business ventures. I certainly believe him. Career coach, Dan Miller, suggests that VC firms fund a mere 1% of the ideas that come their way.
Regardless of whether you are looking for investors to fund your next idea or are willing to bootstrap it yourself, one of the primary reasons to pursue cash flow streams and financial independence is to be able to take advantage of unique opportunities, including pursuing dreams and passions that require some time to get off the ground. The old saying is that success happens when preparation meets opportunity. How unfortunate is it when that opportunity finds us wholly unprepared.
To every man, there comes in his lifetime that special moment when he is figuratively tapped on the shoulder and offered a chance to do a very special thing, unique to him and fitted to his talents. What a tragedy if that moment finds him unprepared or unqualified for the work which would be his finest hour. Winston Chruchill
Cash Flow Is Important to Fulfill Your Obligations
Being able to meet your obligations is a critical aspect of any financial plan. Again, over 60% of people live paycheck to paycheck, meaning an unscheduled interruption in your job salary can cause financial crisis in the majority of households. This is unfortunately a repeating cycle too. It’s painful, for instance, to see someone work for 25 years and only have a gold watch to show for his many years of faithful sacrifice. In such cases, when something comes up, he is practically no better off than when he was hired decades ago. Alas, old habits die hard.
Security is the ability to produce. General Douglas MacAuthur
Personally, when my income from my then primary employer practically ceased for 3 months nearly 2years ago due to a “clerical error,” I gained much insight into and first-hand experience of the power of having multiple income sources and adequate liquidity. As I reflect on the numbers, my primary employer (40+ hours per week) was no longer my main income source. Thus, what should have been a struggle wasn’t. The ability to stay afloat during financial adversity is why maintaining good cash flow and financial solvency are critical: one can withstand substantial fluctuations or even interruptions in job income while remaining solvent. That is obviously an inherently less risky scenario. There’s power in focusing on building cash flow streams and diversifying income.
Cash Flow is Important to be Able to Retire Early
Financial freedom is important, even if you decide to work.
I can only speak for myself on this point, but retirement doesn’t excite me nearly as much as having the ability to retire. Personally, I believe work should fulfill your life’s vocation and purpose, which goes infinitely beyond a job or even a career. While I can’t tell you how I will feel in 15-20 years, I suspect that I will constantly be “working” on something regardless of my financial situation. For example, there was a family member who was out of work for a brief period last year, so I bid on some online jobs and “hired” her to perform them. My “work” was merely checking and occasionally editing her work, where necessary. It was a win-win scenario for all parties involved in many ways. As long as my work is an authentic fit (in line with my skills and abilities, my personality, and my dreams and passions), my personal bias is that work is good.
We all want “to live, to love, to learn and to leave a legacy.” Stephen Covey
Perhaps you are wondering, if I am such a proponent for work, then why would I stress financial freedom? Briefly, financial independence means you write your own script. You decide your priorities, your growth, your pace, and your risks. You are a king of sorts because you exercise great control over your destiny. The decision of whether you can send “junior” to college is no longer based on whether a shareholder who doesn’t even know your name sees you as fixed overhead. In short, financial independence and work, even at a conventional JOB, are not necessarily competing priorities depending on your income, your strategy for managing your finances, your career advancement opportunities, and your ability to create income outside of your job.
Closing Thoughts
Proper cash flow management is amongst the most important concepts in personal finance. The true marker of financial intelligence is not how much money one makes but how much one keeps. While there are plenty of competing interests when it comes to personal finance and personal development, let me suggest that instead of clinging to the trappings of life, the illusion of job security, the possibility of a promotion, or the pedigree of certain academic institutions, cling to solvency, cash flow management, and financial security. If you resolve to do anything related to finances, resolve to make cash flow your priority today.
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Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
I am absolutely agree with you. Just like knowledge means power so does having money. You don't have to be rich to be happy but money does provide opportunity; it provides choice. You don't have to do something- you do it because you want to.
Great point Roshawn! To give another example, look at big companies like Apple and Google. Even though the economy is bad, hiring is at an all time low, companies today are sitting on more cash than ever before.
This is the cushion they build up to tide through tough times. This is something we should look to emulate.
A company that is not prepared for tough times will be wiped out. Same goes for individuals and families. Don't become another bankruptcy statistic.
Love it. That's freedom, and that's what having adequate resources provides: freedom to choose!
Yep, I noticed that many companies started deleveraging extensively in 2008. Just like you said, it would behoove use to emulate the successful ones. There's a reason why they are still in business, despite tough competition, changing work models, and complex regualtory environments. We defnitely don't want ot be a bankruptcy statistic (or even an indebted household statistic for that matter) ! Cheers!
I see myself as a great money manager. I think I constantly wring more out of money than most. I keep my expenses very low and max out my retirement savings. I have no debt except for a small mortgage which will be paid off in 5.5 years. Because of all the above, I live very well.
You sound like a good money manager to me. You're hitting all the right marks for sure, and that doesn't come easy given some of the other things competing for your dollars. I love hearing about great examples of people living well!
Cashflow is very important, agreed. I believe in keeping a healthy gap between expenses and income as well as keeping overall expenses low, so that there is plenty of buffer for savings and unexpected expenses.
That's a great strategy that we can employ in an almost income-independent fashion. As long as we control these two things well, fulfilling the other important financial obligations is rarely a struggle for most people.
Enjoyed your post. Excited to be able to retire than retirement itself. Nice. Plus controling your own destiny and writing your own script? Priceless to feel so free. Thanks for sharing!
I like your views on retirement. To many people think of retiring from their job when IMHO their mindset should be on retiring to something whether it is different work, volunteering etc.
Having the choice is key.
Great post!
Thank you for visiting!
You have honed it on the major focus: freedom. Freedom is key, and I agree with you. It is priceless. The more free I become the less appealing financial bondage appears. Kind Regards!
Thanks Robert!!!
I'm so with both you and Buckinspire! I can think of nothing more boring than having nothing to do. I certainly don't want to deteriorate. Like you said: work can take many forms, and it's the choice of how you incorporate work into your life that is key!
I love your insights!
You are a very good writer Roshawn. I love this post. I believe in cash flow 100%. It give you choices and opportunities. Living paycheck to paycheck severely limit your options. I want to leave my job while I'm still young, but I don't think I will ever stop working completely.
Thanks Joe!!! You're so awesome for saying so!
With the increased awareness sites like RB40 produce of concepts such as financial independence, I think you are doing your part in steering people towards cash flow. I think it is very important that people see models like you. How many people develop and follow a plan to retire while young enough to enjoy it. That's really remarkable! Also, I'm glad you play to keep working during retirement, which means I can enjoy more posts 🙂
I can't believe 60% of people live paycheck to paycheck 🙁 I would feel severely stressed if I were in that position.
I like being able to save money for emergencies and for my retirement. You never know what life will give you.
Great and reflective post, Roshawn.
My whole goal is to get rid of the debt so my cash flow will be so positive that I would be able to take a vacation every month if I wanted to.
I agree with you, financial independence is more about having the ability to quit your job if you want to. Our 3 kids keep us somewhat tied to our jobs now, but once they are off the payroll, I think 'work' life if going to get pretty interesting. We will be able to take risks that we cannot take now, and it should be a lot of fun!
Yeah, it is a sad statistic. It's far too common.
I agree being prepared for emergencies and retirement are definitely a must. It decreases financial stress. Ultimately, these are very wise moves and fundamental. Thanks for your comment!
Getting rid of debt is a great way to improve cash flow. Far too many people just focus on the income side of the equation and forget that this is yet another powerful way to increase their profitability.
I can definitely appreciate how the kids will make you want to continue working at traditional jobs, but it also looks like you have a great transition plan, or at least the beginnings of one. Great things. Too few people methodically plan out how they want their lives to go, and far fewer actually follow that plan. Cheers!
Excellent post, Roshawn. You're right on the mark when you say that retirement is not the end in itself, merely the choice (or ability) to retire. As you say, it just translates to liberty.
Spot on! Cash flow is very important. Finance, personal or not, seems to be about ratios not absolute numbers.
Thanks Andrew!!!
I'm happy so many young people have taken this position. I wish such thinking were more prevalent before, but I'm happy to be a part of a generation that is increasingly aware of what financial independence means: liberty!
Thanks Maria!
That's a great observation. I agree. It's the ratios that are very important to be mindful of!
I really enjoy looking at how others manage their money. What a treat to be able to look into a VC financials!!!
Thanks Barb. There were actually two VCs; the other one left me awe struck; I've discussed that meeting previously. I Iove hearing what others are doing as well. It's very inspiring and motivating!
Great post Roshawn!
It's ironic that many of those who work hard enough to retire early are exactly the ones who can't bring themselves to stop working.
You're spot on. The really important thing is the ability to retire. Multiple income streams are important so your income is diversified, just like your investment portfolio. It not only adds an extra measure of safety, it can one day crow into your primary income source, if you so desire.
Yes so true. Cash flow to retire early is important or else your opportunities become more limited as you get older. It's very scary when you think about it.
Thanks so much Steve,
The irony that you point out is particularly insightful. I think people like the control over their destiny but not necessarily the lack of doing anything, which is often how people typically portray retirement: yuck.
The multiple streams of income is very important, just like an investment portfolio (as you said). It's very much a part of your retirement plan, IMHO, and infinitely more secure than trying to live solely on one income source (unless that source is substantially large and even then, it is dangerous)
That's a great point. Our vulnerability does change with age. While some opportunities decrease, others do increase. I try not to buy into the fear aspect, but that doesn't mean that I don't prioritize the cash flow. As you indicate, it's very important!
Thanks for your comment!!!
Excellent one! Yep, motivation is mightier than discipline and persistence is the key.
Money is power!
[…] Did you know that 60 percent of households live paycheck-to-paycheck? Roshawn Watson met a venture capitalist (a man whose business is to fund start-up businesses), and was curious to see how the he managed his personal finances. “Surprisingly, he only devoted 10% of his personal income towards ‘speculative’ investments,” Roshawn writes. Read more lessons from the VC in this post that offers 3 Reasons to Focus on Household Cash Flow. […]
[…] Did you know that 60 percent of households live paycheck-to-paycheck? Roshawn Watson met a venture capitalist (a man whose business is to fund start-up businesses), and was curious to see how the he managed his personal finances. “Surprisingly, he only devoted 10% of his personal income towards ‘speculative’ investments,” Roshawn writes. Read more lessons from the VC in this post that offers 3 Reasons to Focus on Household Cash Flow. […]
[…] Did you know that 60 percent of households live paycheck-to-paycheck? Roshawn Watson met a venture capitalist (a man whose business is to fund start-up businesses), and was curious to see how the he managed his personal finances. “Surprisingly, he only devoted 10% of his personal income towards ‘speculative’ investments,” Roshawn writes. Read more lessons from the VC in this post that offers 3 Reasons to Focus on Household Cash Flow. […]
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[…] Did you know that 60 percent of households live paycheck-to-paycheck? Roshawn Watson met a venture capitalist (a man whose business is to fund start-up businesses), and was curious to see how the he managed his personal finances. “Surprisingly, he only devoted 10% of his personal income towards ‘speculative’ investments,” Roshawn writes. Read more lessons from the VC in this post that offers 3 Reasons to Focus on Household Cash Flow. […]
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