Managing your cash flow well is the first step to help grow and preserve your wealth. This simply means monitoring your monthly income and expenses to ensure you have a surplus – which you can then either save or invest. Putting a proper budget in place allows you to plan out clearly how to reach your financial goals, while setting aside savings will put you in a better position to deal with any unforeseen issues along the way.
Below we outline five key ways to effectively manage your cash flow:
- Know your incomings and outgoings
Start by quantifying your monthly income and expenses over the past year. This will give you a good gauge of the monthly surplus or deficit you’ll face in the future.
2. Understand the nature of your income and expenses
Next, examine your sources of income. Were these income streams relatively predictable over the past year? If so, planning will be easier. Otherwise, you may need to take a harder look at your expenses and distinguish between what’s necessary and what isn’t.
3. Earmark future large-scale spending
Whether it’s a house, a car, or college education for your kids, it’s important to factor big-ticket items into your budget. This will inform your decisions on how much to save or invest, and what type of investment vehicle to use.
4. Save in proportion to your income: the 50/30/20 Rule
If in doubt about how much to save, you can follow the popular 50/30/20 rule of thumb: allocate 50% of your net income toward needs, 30% toward wants, and the remaining 20% toward savings, investments, or paying down your debts.
5. Create an emergency fund
Before doing any investing, don’t forget to set aside an emergency fund to help you cope with any unforeseen circumstances. Ideally, you ought to have enough cash to cover three to six months of living expenses.