Your Cash Flow Planning

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If I was to ask you how much income you would need each year to feel financially secure, would you know your number?

Or would you pull one out of thin air?

$50,000? $100,000? $250,000?

Let’s say your number is $100,000, with no rhyme or reason.

What total amount of money would you need to have accumulated and invested to be able to generate $100,000 each year, for the rest of your life?

That’s a great question!

But here is an even better question: What would you DO if you were financially secure, generating an income each year that took care of your needs?

Would you travel? Do yoga every day? Play golf every weekend? Enjoy long brunches? Write a book? Join a photography club?

For me, images of travelling the world come to mind, especially when you start thinking about currency conversion rates, where $1 in Australia can afford you much more elsewhere and all the adventure that travel offers. THAT gets me excited.

And I want you to be excited about what life could be like for you too.

Many people spend a great deal of their life working, accumulating savings (but not always!) and ambitiously setting wealth targets to work towards. If they can achieve these targets over their working careers, which could be several decades, they then give themselves permission to enjoy life, but not always. 

But that’s not the point. 

The question I want you to ask yourself is, how is it that people set these targets? What are they basing these targets on?

It may not surprise you to hear that most people do not spend time getting into the detail of understanding the difference between what financial security, financial comfort and financial freedom means uniquely to them. They usually pluck a figure out of thin air and say to themselves, “If I could accumulate $10 million, I would be happy and could enjoy living off the income for the rest of my life.”

But is this really true?

Is it reasonable?

It is unreasonable?

Why $10 million?

I do not want you second guessing yourself.

What I really want is for you to understand the difference between financial security, financial comfort and financial freedom uniquely and specifically for you because knowing what these numbers are is an empowering experience and once done, will give you clarity on exactly what you are aiming for when it comes to growing wealth and why. 

Knowing these three distinctions helps you filter out all the distractions of what other people are doing and what uncertain idea you may previously have had about what wealth goals could be or should be for you, if at all.

HOWEVER.

And yes, there is a but.

Before we get too carried away about how your future self would like to enjoy life, and what the difference is between financial security, financial comfort and financial freedom, you need to take stock of where you are right now.

And yes, you guessed it.

I am talking about taking a good look at your current financial situation.

Because ultimately, you need to measure where you are right now so you know your starting point and what you can do about it to change it if you need to.

Creating a Cash Flow Plan

This exercise will take approximately one to two hours, so by all means switch off any distractions and get a coffee, wine or whatever else you need to feel comfortable and settle in. Your future self will thank you greatly for doing this!

Start by downloading one month’s worth of bank account and credit card statements. If you are feeling particularly game, do three months! Most people I have spoken to about this like doing one month to start with, so whatever works best for you, go with it.

Ideally have your statements printed out next to you as you do this exercise. For me, I only use one debit card which is linked to my primary bank account and one credit card account. All transactions run through either of these accounts, so I would only need these two statements for any given month. If you have multiple cards or accounts, you will need a monthly statement for each card or account.

Next, download the Cash Flow Planning Tool spreadsheet found at the bottom of this article and start going through each statement, entering in each transaction from your statements chronologically in the first tab. Fill out all the fields, including your personal assessment of whether that expense was necessary in the final column (we’ll come back to this column).

Once completed, click on the second tab and using the information you completed in the first tab, now fill out each category if applicable in the second tab to the best of your ability. Adjust names of categories where you see fit and leave those that are not needed.

You now have your yearly cash flow, congratulations!

You can see clearly from this picture where your money comes from and goes towards, whether there are savings left over and most importantly of all, whether anything can or should be changed. Doing this is incredibly helpful and will give you valuable insight. Now, before doing any more work on this spreadsheet because yes, there is a third tab, hit pause, hit save and let’s talk about financial security, financial comfort and financial freedom and what they mean for you.

Financial security, Financial comfort and Financial freedom

What are these three classifications and why are they are important?

1. Financial security is knowing how much you need to meet your basic needs (ie, mortgage, utilities, groceries).
2. Financial comfort is knowing how much you need to support your current lifestyle. 
3. Financial freedom is knowing how much you need to support your ideal lifestyle.

These three classifications or numbers become your progressive financial goals. We are going to focus on financial security and financial comfort in this article, because financial freedom is explored in a completely different article and opens up a much wider discussion.

The reason these three classifications are important is because when each is progressively reached, especially the first two, they give you confidence that you have reached milestones in being able to support yourself financially without needing to second guess or compare yourself to others, and that is an amazing place to be in life.

(1) Financial security

Calculating financial security is done by adding up the following:

• All of your Home & Utilities
• All of your Insurance & Medical
• All of your Groceries
• All of your Transport & Auto

If you work towards being able to cover this total number each year for the rest of your life, this is an extremely fulfilling place to be!

(2) Financial comfort

Calculating financial comfort is done by adding up the following:

• All of your Home & Utilities
• All of your Insurance & Medical
• All of your Groceries
• All of your Transport & Auto
• All of your Personal
• All of your Entertainment

As with financial security, if you can reach this total number each year for the rest of your life, you are officially financially comfortable!

What can you change to improve your current cash flow?

To finalise your numbers, move to the third tab and really look at each of your expenses. Can any of these be changed to reduce your costs and enhance your savings? Have a play with the spreadsheet and see what the impact looks like to your net result. Are the changes you make achievable? Reasonable? Doable? 

Ultimately what you save is the source of what you use to reduce your debts (if you have any) and then invest to grow your wealth and reach your financial security or financial comfort, so have a good think about this.

A great starting point is to go back to the first tab of your spreadsheet and review the expenses you marked as unnecessary or unsure. It is not for me to tell you what you should or shouldn’t spend your money on, that is entirely up to you. Whatever you can change, give it a go, have fun with it and experiment! 

All I will say is this: take your resulting financial security and financial comfort numbers and multiply them by 20. That is the total wealth you will need to generate a 5% income stream which equates to your financial security or financial comfort numbers. 

The math is simple – the more you can save now to pay down your debts and increase your savings so that you have more to invest with, the faster you will reach your financial security or financial comfort.