27 Apr Lazy Cash
You’ve created your budget – congratulations! I have two questions for you. After you’ve paid all of your monthly expenses, how much do you have left? I call this amount your positive cash flow. What percentage of your positive cash flow each month goes to savings?
I’ve asked a number of financial advisors the second question. Their answer startled me. An aggressive investor saves 30 percent of their positive cash flow. When I asked where the other 70 percent goes, I was shocked again. Most people don’t know where the 70 percent goes. It just gets spent. If you have a budget, this shouldn’t happen. Ideally, you want every unspent dollar working for you 24 hours a day seven days a week. Why is this important? Every dollar that’s working for you is moving your dream one step closer to reality. The more money that’s working for you, the less money you’ll need to earn!
Let’s compare the difference. Let’s assume you have a monthly positive cash flow of $1,000. If you save $300 a month for twenty years earning six percent, your savings account balance will be $304,122. If the entire $1,000 were saved, at the end of twenty years your savings account balance will be $627,551. That’s an additional $323,429! One small change in the way you manage your cash can make a very big difference.
All of your positive cash flow should go toward achieving your goals. No exceptions! I know the pushback. What happens if something suddenly comes up or am I suggesting that at the end of the month there should be nothing left in your checking account?
If you’ve just begun budgeting, it will take a few months until you feel good about how much you spend and when you spend it. So, in the beginning leave yourself a little cushion. Remember your goal is to spend just a little less than what you anticipated. If you have a few dollars left, you can use those dollars to either build your emergency fund faster or achieve your long-term goals.
If you’ve built an emergency fund, you won’t have to worry about unexpected events. An emergency fund will enable you to relax.
Your bank is a great place to build and maintain either part or your entire entire emergency fund. Many financial planners recommend your emergency fund equal between three to six months of household expenses. This is your cushion in case someone loses his or her job or there’s an unexpected or unplanned large expense.
Once your emergency fund is fully funded, your positive cash flow can now be directed toward achieving your long-term goals. You’ve worked hard for your money so remember, keep your money working for you twenty-four hours a day seven days a week.