Following feedback from our clients, the next in our series of ‘Ask the Experts’ articles looks at ways to create cashflow. Leading this discussion is Tribeca advisor Matt Rea, who offers up a host of top tips and tools as well as his thoughts around why it’s so critical to start as early as you can to take charge of your money.
Cashflow is one of our most talked about topics. Why is it so important to focus on?
Cashflow is all about creating and capturing a surplus from your income. Your surplus is your tool for allowing you to achieve your goals; from investing to lifestyle to retirement.
It’s central to shaping your financial plan; and your financial future.
Think of it like this. If you’re spending all your income, you’re really not going anywhere. This is the trap many people fall into, especially at the beginning of their careers when they start earning money. As their income increases, so do their discretionary expenses (a phenomenon known as ‘lifestyle creep’). They end up with solid superannuation, but nothing left over to afford that house or go on that holiday because there’s no surplus to draw on. They focus more on the here and now, rather than setting themselves up for the future.
But that doesn’t mean managing your cashflow can’t be fun. It actually unlocks more possibilities. It’s having the right mindset. It’s using cashflow with purpose. That’s the key.
So the earlier you can start creating good cashflow habits, the better?
Definitely. When you’re younger, you’re the most malleable. You haven’t been living a certain way your whole life. So you can change things up easily, like how your banking structure is set up for example. There’s not as many barriers to stop you.
And the sooner you start, the greater the benefit you’ll see from building up that surplus over time. Things like compound interest from investing which can make a massive difference to your financial future.
It’s far better to have a surplus building up over 20 or 30 years rather than just forcing yourself to create a surplus later in life at a time when you need to start saving for retirement. Considering many people don’t know what they’re spending, and therefore how much they’ll need to retire on, getting a handle on your cashflow as early as you can is critical to your financial wellbeing.
Want to learn more about our Cashflow Coaching services? Click here.
What’s your top tips to creating cashflow?
Automate your banking
This is our number one tip as it forces you to change habits and makes it less tempting to dip into your surplus. It works like this:
- your income comes into your main bank account (an offset account can be wise if you have a home loan), and then is separated off to a separate account for discretionary spending which is paid automatically to you each week.
- That discretionary account is set at a level that allows you to pay for everyday expenses like groceries, entertainment, clothes, fuel, etc; but nothing more. So if you’ve set yourself a budget for $1000 a week, if you hit that level you can’t spend anymore.
- Within your main/offset account you direct debit all of the fixed amounts you need to live off such as your mortgage/rental, insurances, rates, investments, etc.
- All of your budgeting is set so you can maintain a ‘cashflow buffer’ that is there for emergency. We recommend always having at least 3-4 months of living expenses set aside.
- The surplus that sits outside your fixed and discretionary costs and ‘buffer’ is then able to build steadily in the background without you needing to think about it – or touch it.
Invest regularly (and early in life to allow compound interest to do its magic)
As I mentioned earlier, the sooner you can get into a cashflow rhythm the better. And a big part of this is putting some of your income into a form of investment that aligns with you and your goals. Again, if you can set up a structure where that amount you are investing happens regularly and automatically, it’s going to be so much easier to stay on track.
Don’t let bad debt get in the way
The biggest trap and obstacle we all face to creating cashflow is bad debt. And with the recent introduction of options such as Afterpay, that temptation to buy beyond our needs is even greater. Removing or reducing credit card debt is a major step to freeing up cashflow.
There’s a classic book written in 1926 called The Richest Man in Babylon, that dispenses financial advice through a collection of parables set 4,000 years ago. One of the key themes running through the book is pay yourself first. Paying yourself first means investing in your future (i.e.. in an investment or debt repayment) before you pay your Woolworths, Apple or the local pub. It’s such a basic principle; but such a valuable one. Use the money you do have in your hand on well considered choices. Not chasing reward points and spending money you don’t have which can only take you further away from your goals.
It’s simply not worth it.
Hold yourself accountable
The easiest way to do this is to work with a financial advisor who can help you to set up your cashflow structure and keep you on track. A plan will only work if you can stick to it. An advisor can give you a hand when you need it, as well as give you some tough love if you need to change your behaviour. This is particularly important if you’re in a relationship, where one partner may have a different opinion or behaviour to the other. An independent voice can be invaluable in offering solutions that work for both.
We can help you get on top of your debt with our debt management services
Can you recommend some tools to help you with your cashflow?
Top of the list is our Tribeca Tracker platform which comes in an App and desktop version. It’s very easy to use, works in real-time, and allows you to bring in all of your banking, income/expenses, insurances, etc so you can create and then manage your budget and cashflow.
Bill Comparison Guides
Saving money on your fixed costs – bills, utilities, insurances – can have a major impact on your cashflow and savings. We’ve created our own Bill Comparison guide that provides a list of helpful links to steer you in the right direction.
Debt Repayment Calculators
Our Credit Card and Mortgage Repayment Calculators can help you manage your debt and get both under control.
If you shop online, one of the best ways to save money and better your cashflow is to use discount codes and vouchers. The Honey App (that our own Tribe swear by) plugs into your browser and automatically finds you discounts. It’s free to use, doesn’t share your information, and has received wide-spread positive reviews from the industry.
The Barefoot Investor
The Barefoot Investor, AKA Scott Pape, offers plenty of helpful resources and insights around cashflow and budgeting that are well worth checking out.
If you would like to discuss your current financial and/or cashflow situation we’re always ready to chat. Please talk to your advisor or arrange an appointment with one of our Tribeca Tribe here.
Would you like to read more from our experts? You can by clicking on the following links for our Ask the Expert articles on financial wellbeing, cashflow coaching, career transition, superannuation, lending and the recession.