If you clicked on the title and reading this right now, I know you are ready to make things right in your life! Congratulations for taking this important step. Before we can start thinking about brining in more money, we need to look at something else that is happening right now. Positive cashflow doesn’t mean how much you’ve got in your bank, but the inflow of your money, income, and also the outflow, your expenses. So increasing your inflow and reducing your outflow will result in positive cashflow, so let’s work on managing your expenses first.
Expenses can be classified into 3 categories:
- Necessity. Necessity expenses are money spent on things you NEED. Food, Water, basic clothing and transport to work are examples. These are money spent to ensure that you cannot survive without it, very basic kind of things that will keep you going. Money spent here will never come back, so these outflows go directly to the drain.
- Optional. Optional expenses are things that you spent on that you can live without it. Things that help you to enhance and improve your lifestyle, add comfort or gratification are all optional expenses. It is hard for some people to differentiate Necessity or Optional expenses. Well, most millionaires cut down a lot of their optional expenses because they can live slightly out of their comfort zone and able to wait out for better optional expenses. So expenses here are discretionary and it is the factor that determines how fast you can increase your cashflow. If you can settle for less, the earlier you will achieve higher positive cashflow and resulting better results. For me, I do set aside a fixed monthly amount for optional expenses and it is working well for me. I agree that we need to spend something that make ourselves happier and motivated al the time. :)
- Investment. Investment are money you spent which you expect yielding more returns in the future. It may not be in monetary form, it might be in other forms like health or skills. You can invest in a pair of sports equipment so that you can go jogging everyday and keep yourself fit. Or you spend money to attend a financial management course that will help you to understand managing your funds. Many people use investments as excuses to spend on optional things, like I need a faster and more powerful computer so that I can perform better. True it helps, but can you do without it? Is it worth the money you “invested” in? The return of investment is something to consider in this case. And of course monetary investments in buying financial products like mutual funds, stocks, investment packages will increase your return.
If you can effectively manage how you use your money, you can control your expenses well and gradually increasing your positive cashflow. How often do you do financial management? Millionaires do it everyday! They spend an hour or so, assessing their expenses and reviewing their funds on their desks or spreadsheets in their computers. It’s a habit that we should adopt too, by looking through what you spent everyday is an easier way to see how much you spent on necessities or optionals and even investments. A general guide is necessities should be roughly the same amount every period and spend less in optionals and spend most of it in investments. Let most of your money work for you and not working for money!
So the first thing is to invest in your ability to reduce your expenses. Do spend some time researching on how you can cut down your expenses, look through your daily expenses and determine what are optionals / necessities and how you can use your money for investments. Here are some really great books that I recommend, Wink and Grow Rich (Wealth Dynamics)
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