Have you heard a lot of people talking about investment recently? Since the covid 19 pandemic, the market was booming and then market was slowing down and sloping downwards recently. Now, many people start worrying whether it is the right move to invest.

Investment is actually only one part of financial planning especially on wealth growth. To ensure one's financial is being planned properly, one needs to plan well for the cash flow and asset & liabilities too. So, in this article, cash flow management will be discussed. How are we going to improve cash flow using personal financial statement? In the next week article, I will touch on balance sheet which can help us examine our assets and liabilities.

Cash is king. I'm sure you hear about that. However, cash flow is the lifeblood of the personal financial management. Without positive cash flow every month, you will feel insecure. Even you want to grow your wealth, there is nothing much you can do because you don't have much cash in hand. Hence, the first step before we grow our wealth is to ensure we have the positive cash flow. We can diagnose our cash flow problem from our income and expenses statement. You can download the spreadsheet here.

There are 2 components in the income and expenses statement. Over the years, I found people recording their expenses. We not only need to keep track of our expenses, we need to keep track of our income too.

Some may say "income also need to keep track mer?" Well, it is to remind you how many income sources you have. Warren Buffet said "never rely on single source of income".

Under the income categories, there are earned income, business income, investment income and system income. Ideally, one can have all these 4 types of income. Earned income is the employment income via trading time for money. Business income is to make money using team or selling product or services. Investment income is to employ money to make more money while system income is income from royalty, intellectual properties or system created.

Under the expenses categories, you can classify the outgoing with these several categories: Personal and family expenses, dependent care, utilities / property maintenance, transport, education, leisure, insurances, taxes, personal saving, loan commitment and others. The reason why we need to classify the expenses is to understand where we spend the most money and these can help us to identify from where we can cut our expenses from.

Once all the incomes and expenses are identified, we will need to calculate the difference between these 2 items to get the monthly cash flow. If we can get positive cash flow, it is good. If we get negative cash flow, we need to either cut expenses or increase income. Watch this video on how to save more money and watch this video for different types of income sources.

There are also several financial ratios to check to make sure our money outflow is right. Generally, the debt service ratio (DSR) should not be more than 40% of the salary in paying loan installment. High loan installment means one is borrowing more than what he or she can pay off in loan term. It will reduce one's solvency rate. One should save minimum 20% of the salary for future goal such as retirement goal or children education goal. Without adequate saving, one will need to work harder in the future and can never stop working. Lastly, the 40% remaining is for lifestyle expenses. If one can spend less than 40% of the salary on lifestyle and living expenses, it is considered good. All these ratios can be obtained from the financial ratio tab in the excel sheet that you can download here.

Understanding these ratios and how much one spends and earns will give one's clarity on financial security. If one is able to save min 20% of the saving, he / she is considered as financial secured which he / she can proceed to the next stage of wealth growth. We shall look into the balance sheet next week.

Watch the video for the same topic here.

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