Many people believe that wealth is the natural product of earning a high income. I don’t believe this is true.
Wealth is the result of hard financial work. Wealth requires planning, making smart spending decisions, and making smarter saving decisions. The backbone of these things is simple: understanding and taking control of your cash flow.
What is Cash Flow?
Cash flow is literally the flow of money to and from you in a given period of time. Typically, we look at cash flow in terms of month or year. The money flowing to you is your income. This can be active income earned as a result of your contract, or because you’re involved in other business pursuits. Passive income might be less obvious - brand sponsorships, ongoing royalties from an ad campaign, interest earned on investments, and other hands-off ways you earn money can be classified as “passive.”
The money flowing away from you is your list of expenses. I like to classify expenses in two categories: wants and needs. The truth is, the vast majority of our expenses are wants. We need very little to survive: food, shelter, clothing - the basics. Anything beyond that is something we want to have.
Don’t think that just because something is a “want” that makes it unimportant. The key is to understand the why behind wanting specific things, and address those motivating factors.
Aligning Your Expenses with Your Values
It’s important that your expenses - needs and wants - lineup with what you value. I typically recommend that you go old school when it comes to evaluating your expenses. Write down everything you spend money on in a given month. If you have annual expenses that you pay once a year, list what their monthly amount would be and add them to the list, too.
Take a hard look at this list. Which of these expenses directly contributes to a deeply-held value of yours? Some of them may surprise you. For example, if you value time with your loved ones, your annual vacation budget actively contributes to incorporating that value into your spending.
Value-based spending is the key to eliminating unnecessary expenses. If all your expenses contribute to either something you need or something you value and want to incorporate into your life, you’ll start to feel financially fulfilled. It also helps you focus future spending on your values and goals, rather than on more “stuff” you don’t need.
Is There Extra?
If you’re a high income earner, you likely have a significant portion of “extra” each month. In other words, you’re making more than you’re spending. That’s a good thing! But do you have a plan for the “extra” cash flowing to you?
Dangerous things happen when you don’t have a plan for the “extra.” Bad spending decisions creep up on you, lifestyle inflation’s draw is difficult to resist, and you might find yourself in a frustrating cycle of spending your wealth rather than growing it.
The reason behind knowing your cash flow is to know how much “extra” cash you have coming in, and to make a plan for it. In some cases, it makes sense to allocate some of this extra money toward value-based spending (time with family, taking care of aging parents, donating to a charity, etc.). However, it’s also useful to use this extra cash to bolster short and long term savings goals.
Of course, savings goals are also deeply rooted in your values. For example, you create a retirement savings plan that reflects the kind of life you want to live during retirement. You may value taking care of aging parents or family members, sending your children to a good college, starting a scholarship fund that supports students from your alma mater - there are a number of values-based savings goals you could set. This is where “extra” money should be funneled.
Learn From the Successful
In my eBook, 10 Ways to Go Broke, I talk about learning from others who have been financially successful. You may already be envisioning a fellow athlete, or a famous business mogul who’s worth billions. Personally, I took many lessons from my grandmother.
I have very few memories about my grandmother - she passed away when I was young, so I never truly got to know her. However, one thing I do know is that she was incredibly smart about her money. Friends and family often came to her for loans, and she always had more than enough to get by. And guess what? She wasn’t an athlete. She wasn’t a successful founder of a big, international business. She cleaned houses for a living.
But she was a student of money. She made a financial plan, spent modestly, invested wisely, and always focused on her long term goals. We can all learn a thing or two from people like her.
Always Remember: You’re in Control
Cash flows to and from you, but you’re in control. You have control over your investments, the income-earning opportunities you take advantage of, how you spend your money, and how you save. The biggest lesson about cash flow we can learn from people like my grandmother is that you can’t let your money control you. It’s tempting to spend on things we want right now, but if those expenditures don’t line up with our values, we’re better off using our incoming cash flow to prepare for the future.
You have the power to take control of your cash flow - but sometimes it’s easier said than done. Branning Wealth Management can help. Contact us today to learn about our financial planning and investment management services. Together, we can help you prepare for your best future.