Here’s a question: do you know exactly what you spend your cash on each and every month?
That was the intro to this week’s topic of the Rebel Finance School, an online finance course.
This week we talked about the idea of cashflow, an important topic within personal finance.
You may have heard this term at work or within business, but how does it apply to your life?
Cashflow refers to the flow of money coming in and going out of your account every month.
To measure your cashflow, you need to track how much money is coming in and going out.
To have a positive cashflow, you need to ensure you have more money coming in than out.
In this blog, I talk about lifestyle inflation and why society has conditioned us to be spenders.
I also talk about how little spendings add up and a money management system you can use.
Finally, I’ll talk about the concept of buying your freedom and a fun board game you can play!
Lifestyle Inflation
What do you when you are gifted some money or after some time your income increases?
With most people when this happens, instead of saving or investing, they go and spend it all.
This is because people want to have a ‘better lifestyle’. This happens due to many scenarios:
- They get a new job which pays more, so time upgrade to a bigger and more expensive house.
- They are gifted money from a special occasion so they are going to buy things for the home.
- They get promoted at work, which means it time to go on a well deserved expensive holiday.
- They receive redundancy payment, which means only one thing: time to buy a new vehicle.
The problem with this mentality is that as your income goes up, so do your monthly expenses.
As your expenses go up, you become more dependant on your job to maintain that lifestyle.
Ideally what you want to do is increase the income, maintain the expenses and invest the rest.
Society Conditioning
According to a recent study, a quarter of British adults (in the UK) surprisingly have no savings.
A slightly better statistic is around 55% of British adults have between £1 and £50k in savings.
How can this be? Here are some examples how society has conditioned us to be spenders:
- When a contestant wins money on the radio, the presenter asks: what are you going to buy?
- If we get a new job or a raise at work, our families tell us: Looks like it’s time for an upgrade!
- We receive a gift: it’s in the form of a voucher, which means we have to spend it on something.
- Sales in stores entice us to buy things not because we need them, but because there is a sale!
As you can see it’s not your fault that you spend your money: society consciously forces us to.
Please note there is nothing wrong with spending your money on things that make you happy.
But when 1 in 10 British adults spend more money than they earn, then we have a problem!
Death by 1000 Cuts
I love this phrase that was introduced to me this week by the Rebel Finance School course.
It basically refers to the individual expenses that seem small, but collective drain our accounts.
I’m sure you know what I am talking about. Here are some of the most well known suspects:
- Streaming Services: Netflix, Disney+, Amazon Prime, Apple TV+. The list is endless these days.
- Gym Memberships: Why work out from home when you can pay for a fancy workout instead.
- Work Lunches: I could pack a lunch to work, or I could spend £10 a day instead; hard choice.
- Daily Coffee(s): Surely you don’t expect me to give up my daily Starbucks, I need it to survive!
A few dollars or pounds spent every day seem harmless, but add them up and they are lethal.
This is what is meant by ‘death by a thousand cuts’: money that is being bled from your bank.
Have a look at the ways cash leaves your bank and ask yourself: Am I getting value from this?
Money Management
What you need to have is a money management system where money is assigned accordingly.
There are many budgeting systems out there; here is the money management system I use:
- Necessities: money allocated for essential spending such as groceries, petrol, and all the bills.
- Play: money that you can spend on experiences such as going out, dinners out, cinema, etc.
- Save: money that you save intentionally to spend it on something big: deposit, holidays, etc.
- Things: money allocated to purchasing random stuff: things for the house, books, items, etc.
- Invest: money that is put aside ONLY to be used for investment e.g. in your ISA account, etc.
- Give: money that’s set aside every month for gifts and donations such as presents, tithes, etc.
As you can see, it is possible to spend your money on playful things, just not all your money!
If you want to learn more about my money management system, check out my budget blog.
Buy Freedom First
This is another interesting idea that was brought up during this week’s Rebel Finance School.
They ask you a question: would you rather buy a new car or retire 5 years earlier than usual?
This concept comes from the book The Simple Path to Wealth that they recommend reading.
The author talks about buying ‘freedom’ before buying stuff – how does one buy ‘freedom’?
Practically speaking, this means buying ‘assets’ that bring you an income without you working.
You may think this is too good to be true right? Can you really make money without working?
Apparently, this is the position that Katie and Alan (creators of Rebel Finance School) are in.
They say they’ve assets that produce enough income for them to live without having to work.
They used their money to buy assets instead of stuff, allowing them to retire 20+ years earlier.
Now that they have bought ‘freedom’, they can now choose to buy whatever they want next.
How to Buy Freedom
There are many assets you can buy freedom: rent property, buy stocks, start a business, etc.
The method that Alan and Katie used to buy freedom was by investing in the stock market.
More specifically, they say they invested in a collection of stocks also known as an Index Fund.
I have heard of this concept before, but have never met someone who has managed to do it!
The concept is quite simple: you put money in an investment account every month for years.
On top of the money put in, you get interest added to the account that compounds over time.
Once you’ve reached a significant figure, you can start to withdraw money from it as it grows.
I wrote a blog on this explaining how you can turn £180k to £959k using this investing method.
Practically speaking, they must have a huge amount of cash in their ISA to be able to live off.
For example to withdraw a £40k income a year, they must have around £1 million in their ISA!
Play CASHFLOW
As you can see, cashflow is important: do you know where your money is going every month?
Do you spend your money on buying freedom, or do you spend your money on buying stuff?
There is a way to spend your money on both using my money management method as shown.
However, it comes down to your goal: do you want your freedom now or later? It is up to you.
If you want freedom quickly, then you need to spend more on freedom, and less on the stuff!
If you want to learn more about cashflow, I suggest you play my favourite game: CASHFLOW.
It is a fun way to learn about cashflow, and the different assets you can have to buy freedom.
How is your cashflow? Do you choose freedom or stuff? Please share in the comments below!
If you’ve enjoyed reading this, check out my blog on Index Funds and stock market investing.
If you have any suggestions for future blog post topics, please share in the comments below!
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