Ever stressed out about money? Yep, many people have dealt with this. Manage cash flow is all about balances. Cash flow does not flow at any one direction. To make money and live happy, you not only have to make money but will also have to spend and/or invest. Some expenditures are no brainers like paying for necessities such as food, transportation, rent/mortgage and some form of entertainment etc. Other expenditures like investments, academics degree pursuits and learning new skills are not so clear cut. These frequently require careful balance between one’s life goals and objectives and the cash flow levels needed to achieve such goals and objectives. Obvious money/cash flow is only one of the many resources required to complete these goals. However, it can not be emphasized enough that money or cash flow give one the option to pursue such endeavors if one is determined to do so.
I know people frequently talk about how to reduce credit card debts and debts in general by matching interest rates and duration etc. I won’t discuss this topic in this post as that is an after the fact matter. Frankly speaking, once you are able to balance your cash flow properly and set your life’s priorities straight, the resolution methods for those debts will likely become very clear to you. What I want to talk about in this post is the ratio between maintaining a healthy cash flow and pursuing your ambitions. As the old saying goes, it takes money to make money. At the end of the day, it’s just a multiplier game though it can also be a negative multiplier. Do you think it is better to be living paycheck to paycheck if you spend much of your disposable income on travel and entertainment versus you maximizing out your 401(k) or IRA? I think some people might say it depends on the person’s goals and objectives in life which I agree. However, how do you think that person will continuously finance the lifestyle once the person is out of the prime money earning age or run out of money? To put it simply, figurative speaking, to splurge you might just have to first take the plunge. That means you might have to defer your desires to spend initially when you generate little cash flow and gradually splurge more as your cash flow can sustain your lifestyle comfortably. The other piece to this is “betting/investing” on your self. Do you know Lebron James and other GOATesque athletes spend tens of millions on their bodies to ensure they are in the best athletic shape for their professional athletics career? In a similar vein, many families, including the not so wealthy ones, spend a significant amount of their savings on the education of their children? Why are they doing that? There are many reasons for this some involve non-financial considerations like trying to be the best they can be in the case of top athletes in the point mentioned above and in the case of the families mentioned above, they want to make sure their children have the best tools to succeed in the modern world. The financial results are clear. Many of these top athletes can play until their 40s while still making hundreds of millions of dollars per contract. Many of the children who receive the best education have a higher probability of being more financially successful.
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How to manage cash flow when starting from nothing.
Regardless of how much you make or how much you save, in my opinion, the best way to save now is through a 401(k) because your employer will likely contribute a portion of that plus you will most likely defer taxes on the eligible contributions within the states limited of the program. The 401(k) can also be liquid, granted there might be a penalty for early withdrawal. Given the US stock market on average has grown 10%+ annual for nearly 100 years. Per my previous posts, I highly recommend buying index funds that track certain major US indices rather than individual stocks. The stock market is usually top heavy and all relatively. That means over time it usually are a small number of publicly traded companies that appreciate the most. Think about it this way, only around 50 or so of the 500 companies on the Fortune 500 companies list from 70 years ago still exist today. Granted many of these companies might have merged or were acquired, this still give a sense of the reality of the business world. Yes, buying average versus finding the fastest growing company ever sounds like a big compromise, the reality is the choice is actually between the average versus likely over 50% probability of losing it all and that’s stating this point extremely gently. The market is full of extremely bright professionals and extremely bright professed professionals. Even many of them have a hard time of “beating” the market average on a sustained basis. Let’s be honest, does having five million versus ten million dollars when you are at your retirement age really make that much of a difference to your lifestyle? I know having almost nothing because you eventually lost it all because you continue to gamble on your savings versus five million dollars probably make a much much more difference to your lifestyle. Don’t take this for granted. In much of the remaining parts of the world, their people can only dream of this type of safety net for the average person. They are frequently mad and sour because they get almost nothing when they retire not to mention little to no social securities benefits like the ones received by many of the population in the US.
I think the tougher decision is between investment in third parties like index funds via 401(k) versus investment in yourself. Let’s say you are already doing well in your career but is looking to gain additional certification or degrees to make yourself more promotable or learn new skills to make yourself more promotable thereby eventually and hopefully make more money. Fun fact, if you contribute to the 401(k) max annually, usually low five figures plus a small but welcomed additional contribution from your employer for 40 years at 10% average returns, you will have 10+ million in the account at the end of the 40 years although the reality is it will likely continue to grow significantly on its own without any further contributions. On the contrary, if you take 100k out of your cash flow at some point to get a masters at, let’s say, your dream school, is it worth? I don’t have to even calculate this and I think the answer is a resounding yes. With a higher education level hopefully at a great school with a degree in a relevant major to your career, you will probably get a promotion at your current company which likely mean higher pay and possibly higher 401(k) contributions or jump ship to somewhere else that pay you significantly more. The additional cash flow from future benefits of a master’s degree versus putting it into the 401(k) may be more or less, but let’s be honest here, that master’s degree probably mean more to you than another million dollars when you already have like 20 million already. Money will likely grow more money in a dynamic capital market like the one the US has, but not everyone will have the energy nor time to complete a master’s degree when they work a full-time job even if they can afford the tuition.