Many of us want to be wealthy, but few of us realize what it takes to get there. That’s why Keith Whelan founded Cashflownavigator, a site that lets you track where your money goes and gives you the tools to redirect it. He was kind enough to speak with us about how to do more with your money than spend it.
Why do people so often confuse wealth and cash flow?
I think it’s not so much confusion as a lack of awareness of cash flow and its role in managing your personal finances and retirement planning. Most personal finance resources and personalities focus on building wealth (your net worth), but ignore monthly cash flow. Wealth is important, but there is good wealth and bad wealth. Bad wealth increases your debt and creates negative monthly cash flow, but good wealth generates positive cash flow. Once you understand the relationship between the two, you can prioritize your financial opportunities and grow your net worth in ways that maximize positive cash flow.
Where do we start when looking at our cash flow?
I like to frame this in terms of different stages of the financial life cycle. Pretty much all of us start out in the Debt Accumulation stage. To move out of this early stage and into Debt Reduction, look for ways to reduce monthly expenses. That will free up some money to apply towards paying off debts such as a car loan or outstanding credit card balances. Once the first debt is paid off, it frees up more cash flow that can then be applied to repaying another debt. And so on. Doing this moves us from Debt Accumulation to Debt Reduction. As you make further progress, you can then start to use your freed-up cash to invest in assets that not only increase in value, but also generate positive cash flow. Doing this moves you closer to the final stage, Financial Independence.
How do we spot little things that might, over time, be draining our cash reserves that could instead go to retirement?
There’s an expression: “You can’t manage what you don’t measure.” So I would suggest measuring your monthly expenses individually but also totaling them up. Then set a goal to reduce that monthly total expense by, say, $300.
To achieve that goal, yes, look at the little things; but I think it’s even more important to look at the few biggest contributors to your total monthly expenses and attack those first. That way, you’ll get a bigger bang for the buck by focusing on a few high-impact items rather than trying to micromanage dozens of smaller ones.
Why is it so important to see net worth, budget, and cash flow in one place?
It’s more difficult to manage multiple, separate financial documents than a single integrated one. Also, by integrating them you’ll have a better understanding of their relationships. You’ll be in a better position to see your overall financial situation holistically.
How can we reconcile our cash flow with our retirement planning? Where do the two meet and why?
As I mentioned, wealth and cash flow are both important. You want to grow your net worth in ways that maximize your monthly income (from sources other than salary). And ideally, you want to create a number of cash flow-generating sources during retirement.
To accomplish this, I like to start with the end goal and work backwards. For example, in our household our goal is to have 7 sources of passive income (positive cash flow) in retirement. My wife and I are fortunate enough to have pensions from our previous employers, and we will both receive Social Security retirement payments. That’s four. In addition, we have a rental property that is generating positive cash flow; and we have 401(k), IRA and other retirement accounts that will generate monthly income. That’s six. I also own a business, and the plans are for that to be a seventh source of income.
That’s just one example. Your circumstances are probably different, but the principle is the same: set a retirement goal of having a predetermined number of cash flow sources, and then work towards achieving that goal.
What’s the future of retirement planning in your view?
Right now, with the exploding number of financial information sources and so many providers of financial products and services, I think there’s an opportunity to help people sort through it all and boil down the key concepts into something that’s simple and actionable. Also, rapidly advancing technology and new media have created opportunities to provide more effective tools to help us actually take action and achieve our retirement goals.
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