For 15 years I was Treasurer for one of the world’s largest Real Estate developers; one of my many duties included the cashflow management for the company and all it’s operating properties. Proper cash management is at the heart of any successful business, so managing your personal cashflow effectively is key to maintaining a solvent household.
Managing your cash properly will allow you to meet all your expenses on time so you can pay off your debt, start saving for retirement, and retire when you want to. Otherwise, if you don’t manage your cash like a successful business, then you’ll end up working for the rest of your life.
Create a Plan
The first step is to create a plan, specifically, a spending plan. It starts with your income. If you don’t have a plan, then you have no clue if you’re on track. An airline pilot has to create a plan to fly the plane from one point to another; otherwise, no telling where the plane will land. Without a spending plan, the time to retire will come, and you won’t have the resources to retire.
Parse Out Your Expenses
I call it the 25/25/15/35 Rule. It’s easy; start with gross income. From gross income 25% goes to taxes, 25% goes to housing, 15% goes to simultaneously paying down debt and establishing an emergency fund, with the remaining 35% for everything else. Once your emergency fund is adequate and your debt is paid off, then the 15% goes to retirement.
It’s the 35%, or everything else, that gets everybody in trouble because most people have no clue where all their money goes. My suggestion is to write down everything you spend your money on for three weeks. This will become the basis for your spending plan. You will be surprised where all your money goes.
Liquidity is King
Liquidity is so important. After your spending plan is in place, liquidity will be the result of your efforts. Now you’ll have more money for those emergencies as well as those occasional splurges when you see something you just cannot live without. As long as your emergency fund is adequate, and 15% is going to retirement, liquidity gives you financial freedom.
A well-run business has sound cash management procedures; your personal finances should be no different.