DISEASE, war, inflation and myopic national protectionism are disrupting our lives. They are all disturbing facets of VUCA (Volatility-Uncertainty-Complexity-Ambiguity).
Do you worry too much? Do you generally think life is degrading and growing progressively worse instead of incrementally better?
Your answer may hinge upon whether in your heart of hearts you consider yourself mainly an optimist or a pessimist.
Given the extremely lengthy litany of negative observations my clients have had to listen to me list and re-list in recent years on the state of our country, the world and human civilisation as a whole, it would be understandable for a hypothetically well-placed fly-on-the-wall to conclude that I'm a hardcore pessimist.
But I'm really not.
Deep inside me, I retain this core belief, which a very long time ago fuelled my journey from childhood to adulthood: It's an optimism rooted in the soil of my abiding conviction that "things", whatever they may be, will eventually turn around and get better.
That's why I find it calming, comforting and clarifying to slice through the fog of our world's annoying VUCA-ness using one crucial personal finance metric: Our monthly net cash flow quantum.
This measure or yardstick is easy to calculate. Regardless of whether you're looking at actual historical data, such as last month's numbers, or constructing a guesstimate-based forward-looking budget that you think will reflect with reasonable accuracy your circumstances next month, your net cash flow is calculated using only two straightforward financial totals.
This formula explains what I mean:
Net cash flow = Gross cash inflow - Gross cash outflow
If you're into abbreviations, then just remember ncf = gci - gco.
UNDERSTANDING THE FORMULA
Your gci or gross cash inflow is calculated, ideally over single calendar months for convenient record keeping and useful planning, by taking into account your actual cash receipts (or inflows) just in the month you're analysing or planning for; such receipts might include your salary, business revenue, interest earned, dividends and rental received, plus perhaps occasional gifts, royalties and proceeds from the sale of assets.
Similarly, your gco or gross cash outflow is worked out for the same month in question by adding up all the cash, credit card, debit card, e-wallet, cheque and online bank transfers out from your store of available money to pay the world for all the monthly expenses associated with you living your life.
Now, stay focused on this formula:
Net cash flow (ncf) = Gross cash inflow (gci) - Gross cash outflow (gco)
Frankly, most of us don't manage our ncf well. And that's why we aren't as wealthy as we might potentially be. The main reason is our natural preference for immediate gratification ("I want it, and I want it now!") over delayed gratification ("I proactively choose to slam the lid on my passions and appetites and will, instead, sacrifice today so I that I may enjoy a lot more tomorrow.")
Regardless of how messed up our finances might be now, we can begin to rehabilitate them by exercising delayed gratification, injecting its precious discipline into the fibre of our being, and working our way up to generate a positive ncf most months of the year.
Truly motivated individuals will shift heaven and earth to generate consistent positive ncf by ALWAYS ensuring EVERY month's gci is larger than its corresponding gco.
Just doing so, which is not easy, will ensure long-term fiscal health through a growing pile of savings. However, as our whole planet battles massive eruptions of inflation with numerous countries facing multi-decade highs in official annual inflation rates, the role of investments in our lifetime has never been more crucial.
All of us who consider ourselves long-term investors must understand why we actually invest.
FINANCIAL SUCCESS
There are only two reasons for investing money, as opposed to saving it. When we save, we do so to inject calm stability into our lives. We prepare for emergencies and opportunities by boosting our cash reserves.
Note: We all need to save.
But for long-term financial success, we should also opt to invest some of our savings. Most of us save money as cash itself (perhaps in a piggy bank) and within cash repositories like bank savings, bank fixed deposits and money market funds.
Sadly, the yields we earn on our savings are low — very, very low — and well below both the official national inflation rate and, more importantly, our generally higher personal inflation rates.
Which is why we invest.
The twin reasons I mentioned above for investing are specifically to grow our money faster than (1) inflation and (2) taxes erode its buying power.
The only ethical ways to grow stronger financially from one year to the next are to build a successful business, an activity that has a terrifying 90 per cent failure rate worldwide; or to invest in asset classes that compound faster than inflation; or both.
So, to succeed financially, manage your cash flow better, build up healthy levels of savings, and massively strengthen your personal asset base by investing in asset classes like equities; investment real estate; and alternative investments, most notably commodities, all of which should, over several decades, grow faster than inflation.
© 2022 Rajen Devadason
Rajen Devadason, CFP, is a Licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).