TAKE a deep breath. Is the air dirty and polluted or clean and fresh? Uncontaminated air is an obvious human right too many people in too many places lack.
Also, we sometimes read in the papers that effluent discharge by irresponsible factory owners into our fragile rivers force the water authorities to shut off our taps to protect us. Clean water is essential for a high-quality life.
Both our air and our water systems follow separate (flowing) cycles dictated by nature. And just as we need clean flowing air and clean flowing water to thrive biologically or physically, we need clean flowing cash to thrive financially or fiscally.
Stagnant air is not as refreshing as breezily wafting air; and stagnant water is a breeding ground for vile germs and mosquitoes.
With water in particular, we all know the qualitative differences of "stagnant ponds" and "flowing streams". Even their descriptions evoke mental pictures, respectively, of unhealthy and healthy water systems.
East of the Mediterranean Sea, we observe major differences between the thriving Sea of Galilee and the Dead Sea to its south. Those huge distinctions hinge on the healthy flow of water into and out of the former, and the southward flowing water of the Jordan River from Galilee down more than 100km into the Dead Sea.
Note: As the Dead Sea is the lowest point on Earth, there is nowhere for its water to flow out to; therefore, the only hydrologic cycle release mechanism available is evaporation into the air.
Since various compounds and different types of salts flow into the Dead Sea from the Jordan River, but only water vapour escapes upward from it into the atmosphere, the constipated Dead Sea has a salinity level 10 times greater than the average saltiness of Earth's oceans.
Its super-salinity means no "macroscopic aquatic organisms" can survive there. Those include all fish and underwater plants. According to scientists, the only life found in the Dead Sea — apart from unsinkable holidaying humans floating for fun in its dense water — are trace quantities of bacteria and small fungi.
Key lesson: Flowing conduits sustain life far better than do stagnant pools.
CASH FLOW
By extension, I have observed a marked difference in the sense of calm security possessed by older retirees — within my financial planning practice, which serves adults ranging from their 20s to the elderly, including one centenarian — who rely on near-static pools of savings, and those who have built gushing cash-flowing conduits into their bank accounts.
Typically, such channels of flowing cash will initially be filled by active income (AI) earned by adults in the early years of their careers, a combination of AI and passive income (PI) by those in mid-career, and wholly by PI by those who are fully retired.
The income formula I have referenced in several Money Thoughts columns simplifies and generalises these income relationships. It is:
TI = AI + PI, which states total income (TI) equals active income plus passive income.
The core principle governing financial success (and failure) is tied to cash flow. If our cash flow is positive, we're likely to prosper. But if our cash flow is negative — for too long — we will fail financially.
This also applies to business. Peter Drucker, the father of modern management, wrote:
"Entrepreneurs believe that profit is what matters most in a new enterprise but profit is secondary. Cash flow matters most."
Colourful billionaire Sir Richard Branson gives this advice to anyone thinking of going into business:
"Never take your eyes off the cash flow because it's the lifeblood of business."
At the most granular level of any economy, the solitary individual, the same is true. As we mature from young worker to middle aged employee or businessperson to elderly retiree, regardless of what our AI-PI mix contributing to our TI might be, our financial health hinges on positive cash flow.
QUALITY OF LIFE
During our working (AI-generating) decades, the way we channel our positive cash flow will determine the ultimate quality of our (yearned for) golden retirement.
Financially successful people create private pension programmes that pump out more PI than is needed to fund their desired lifestyles. So, even in retirement, they remain cash flow positive.
Such a situation is far better than surviving on a static pool of cash that depletes at an accelerating rate because of inflation and outgoing expenses that are not offset by various PI inflows like interest, dividends, cash distributions and rental.
Finally, when assessing the quality of our personal cash flow streams, be they from AI or PI, the "cleaner" those streams, the less they will be depleted by debt repayments.
It's tough to live in our modern world without accumulating a pile of debt in the form of car loans, mortgages, personal loans, and uncleared credit card balances. These cash flow consuming liabilities muddy our otherwise crystal-clear stream of positive cash flow.
But as we retire each such debt, ideally without adding new ones to the mix, we clean-up our life-sustaining river of cash.
I wish you such success in our still brand new year. Happy 2025!
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-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 X @Rajen Devadason and on YouTube (Rajen Devadason).