This is not a website about making money, but about living a joyful life. Still, you need a minimum standard of living before you can be happy. So here we look at ways to increase your cashflow and wealth that is sustainable in the long term.
Measure your cashflow and wealth
What gets measured improves. At a minimum you need to track your total assets, liabilities, cash inflows and case outflows. Better if you have breakdowns for each category. Try to update this every month.
Don’t worry about finding the right format. Many free templates online are quite complicated, but you can try them if you want.
I suggest you keep it simple for a start. Get a piece of paper and write what you guess the 4 totals are. Replace those estimates with the actual number when your bank statements come in.
1. Your income
List down all your sources of income, being careful to differentiate between two main types of income: active and passive.
Active income is money that comes to you only when you have to perform some sort of action, like go to work.
Passive income will come to you without you have to do anything, like rental from a property that you have rented out, or advertising revenue from a website.
Track your monthly passive income (not active income)
Your active income pays the bills. But your passive income will free you to do the things you really want to do. This is the key figure you need to track. It’s ok if you have no passive income right now. Write down zero, then start working on increasing it.
2. Your expenses
Record the main categories of expenses that apply to you. The easiest way to do this is to key in the amount on every bill that you receive before filing or disposing of the bill. Don’t foget your car-related expenses if you have a car.
Keep a close eye on your total expenses. Whatever you do, this number should not increase. Even if you cannot reduce your cash outflow, cap it at the current level.
Track your recurring monthly expenditures
One-off expenditures are easier to control once you decide to do so. The recurring bills are what usually derail your intentions to save more and grow your wealth. Switch to a less expensive telco, subscribe to fewer paid services. Focus on bringing this figure down.
Your assets and liabilities
Don’t worry about tracking these too much. Basically assets put money in your pockets. Liabilities take money from your pockets.
Your assets and liabilities matter only because they impact your cashflow. Assets generate income and so give you a cash inflow. Liabilities turn up as expenses and form your cash outflows.
Making decisions about cashflow and wealth
Before you make any financial decision, look at this page. If the decision contributes to passive income (cash inflow) or reducing recurring monthly expenditures (cash outflow), go for it. You want every decision to widen the gap between cash inflow and outflow.
For example, you may be thinking about buying a property to rent out. First, calculate whether the net rental is positive. This is your total expected rent minus mortgage, tax, and other recurring costs like maintenance. It is a good investment only if the net rental is positive.
If the net rental is negative, then even though you receive rent and have an asset to your name, your monthly cashflow situation will be worse. Avoid this.
Start measuring your cashflow and wealth now
The coming year looks to be financially challenging for many people. Now is therefore is a good time to get control over your cashflow and wealth. So get this done, and start tracking your key numbers.
What gets measured gets done.
– Sir Ian Kennedy
I looked at my spreadsheet everyday until I got my finances under control. Now I update it just once a month. Managing my money is much easier now because I know how a decision will impact my numbers. So you may have to put in more effort in the beginning but, like all skills, it will become second nature.