Saturday, 21 October 2017

Thoughts on Managing One's Cashflow

In my course of work I come across many people who understand the importance of investing, intend to invest, but are taken aback by the capital required to start.

Indeed, one needs a sum of money to start investing, to earn meaningful returns and diversify their portfolio. But it need not be an insanely large amount, and there are plans and products to lower the entry barrier for beginners, such as regular savings plan and Exchange Traded Fund.

I share my experience of how I accumulate an amount by properly managing my salary, channeling them to the different bank accounts via automated bank transfer, and spend within my means to ensure savings and investment funds are regularly put into good use.

But many people find that a chore, frown at the idea of channeling savings into different accounts and managing them. Some are rather astonished and from their expression, I guessed they find it a daunting task.

I just want to share 3 main points here.

Cashflow Management is The Most Elementary Step of Proper Wealth Planning
This is really the most elementary step. If one is not able to manage his personal cashflow carefully, we cant talk about wealth accumulation and investment.

Ordinary folks have a job that gives them regular salary month after month. This places people in a really advantageous position to invest regularly and grow wealth consistently. It is all the more favourable for certain stable jobs such as civil servant.

Properly managing this cash inflow is ensures that funds are always available when one needs to invest. Buy shares of a good company? Check. Buy more shares to average down? Check. Diversify your portfolio into bonds, Unit Trust, ETF? Check.

If Warren Buffet acquires insurance company to provide stream after stream of investment funds in the form of 'float', salary will be the equivalent of 'float' for a regular retail investor.

Presence of cash gives you an infinitely free hand in deciding the right action to boost your wealth growth when the situation calls for it. If one has spend some effort learning about investment, and avoid suicidal moves and big mistakes he should emerge better end of the day with cash readily available along his wealth journey.

It Does Not Mean One Has to Live Like a Peasant
Apportioning 50% of take home pay to investment, and just maintain a 3 to 6 month worth of expenses as emergency fund may seem very extreme. Most people are put off by the 50% at face value, thinking that they have to live like a peasant deprived of life's basic indulgence.

Well 50% is a level comfortable enough according to my lifestyle standard. There is no hard rule that one has to put aside 50% of salary for investment to achieve financial freedom.

The first step will be examine thoroughly whether one is over-spending on frills; then find practical  ways to reduce these spending. Instead of drinking Starbucks everyday, have it 3 times a week. Instead of meeting friends over restaurants always, try enjoying a meal at one of the new hawker centres, or have potluck at a friend's place.

There is a wide spectrum of choices between living as an absolute peasant/miser, and having the high life with zero savings. Living a happy, meaningful life balanced with prudence spending and sensible wealth planning is possible by viewing it on a scale of degree. It is not a binary choice.

Find an initially slightly uncomfortable spot with a nice saving, investing and spending balance, adjust your lifestyle to that, and stick with it. You will still be able to enjoy life.

It is Largely About The Mental Discipline
There will be temptations and factors pulling you away from your refreshed lifestyle. After all, you have been living in a certain mode for years, and there will be inertia for change, especially the starting. And our society is a capitalist and consumerism one that encourages spending.

Here is the most important point: build mental discipline to stick with your choices.

The straightforward part is to make it harder to touch the funds. For example, automating the transfer process, making the savings/investing account less accessible (CIMB Fast Saver anyone??), or make it a shared goal with your spouse/partner.

The tricky part is to toughen up your mental stance to defend against the urge to spend. There is no shortcut here. It comes easily for minority; but for majority that find this hard, you just have to keep reminding yourself of you goal and push on. Write and paste it somewhere at your work desk, use App to set up blanket budgeting, read more success stories for motivation.

And the good news is, it will just get easier and easier hereon. Studies show that new habits typically take 21 days to form. Such lifestyle adjustment should take longer, but definitely not as tough as one initially expected.

In no time when the habits are ingrained in your lifestyle and you are totally at ease with it, you will be surprised that there is a substantial amount waiting for you to be deployed.


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