Always remember: “The end in mind of having a good cash flow management is to help you to achieve your financial goals”
Therefore, you need to first identify your financial goals before you can effective plan your cash flow. The following are some examples of financial goals:
• Setting up a fund for children's university education or wedding
• Setting up a fund for retirement
• Going on a vacation
• Purchasing a retirement property
• Starting a new business
• Planning to do charity
• Buying a home for yourself or your children
• Buying your dream car
Whatever your financial goals may be, the fundamental elements of a good cash flow management is to effectively find ways to increase the cash inflow and systematically reduce the cash outflow (other than to savings and investments).
Firstly, start by selecting a period for measuring your inflows and outflows. A month is the most common period used. Most of us pay major bills monthly. Almost all of us get paid on a monthly basis.
Income can be in the form of regular income or non-regular income.
Regular income – salary, allowance, rental income, interest, alimony and etc
Non-regular income – Dividend, bonus, proceed from disposal of asset/ investments
Expenses can also be in the form of regular payout and non-regular payout.
Regular payout - Payment of debt, utility bills, insurance premium, children’s education fee, food, clothing, transportation, entertainment, medical cost.
Non-regular payout – Renovation cost, down payment for car / house, travelling and etc
Take your total income and deduct against all your expenses. If the amount is positive, then there is a cash surplus. On the other hand, if the amount is negative, then you have a cash deficit.
To determine your current cash flow position, click Cash Flow Management Calculator.
Cash deficit
This means that your spending is more than your income. There is a cause for concern in such situation. You should analyse your expenses list, identify which are the expenses that may not be necessary / not important, then reduce it or eliminate it totally from your expenses listing. Certain expenses such as entertainment and clothing may be reduce if it is deemed not necessary.
After you have reduced all those unnecessary expenses, recalculate your net cash flow and see whether there is any cash surplus. If you are still in a cash deficit position, then may be you should think of another way of improving your cash flow position (i.e. by increasing your income).
The following are some suggestions on how to increase your income:
a) Find a part-time job.
b) Change to a higher paying job.
c) Sub-let the excess room of your house (if any)
d) Do some investment that will hopefully increase your investment return
Cash surplus
This means that your income is more than your spending. Congratulation!
“What should I do with my excess cash surplus?” This question may arise in your mind. Below are some suggestions that you may consider:
• Savings — Set aside readily accessible cash to cover at least six months of living expenses. Beyond that amount, you should look for an investment vehicle that will pay you a higher return on investment.
• Debt reduction — Are you better off paying down debt or using excess cash for other purposes, including longer term investment? That depends upon your personal situation and tax bracket, and whether you have rental income to offset against the interest cost of the debt that you are carrying. Contact us for further assistance.
• Investments — Structure an investment portfolio which protects you from the effects of inflation. Your portfolio should reflect your short- and long-term financial objectives, risk profile and time horizon.
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