In this section, we would try to understand how cash flows and your personal financial goals go hand in hand, and why cash is the king of your personal finance plan?
Cash is the king. Cash brings liquidity. Cash is the key instrument that helps you to buy the stuff that you need now.
Cash is the big answer to all your questions which involve current cash outlay. Cash is the big building block that is included in your financial plan and each action that you take in your financial plan has ramifications on how you are going to obtain or use the cash. For instance you receive income in the form of your salary from your employer and you use some of that cash to spend on product and services. Other examples of income might include rental income from property, or interest income, or capital gains income from stocks that you own.
Budgeting your expenses and incomes lets to get hold of the cashflows and allows you to determine how much cash will be available to you at your disposal. This amount of cash, that you hold in your hand, indicates the level of financial freedom you have at a given point in time.
Cash (available for spending) offers a unique sweet spot that balances your financial security and financial freedom.
Budgeting allows you to determine the flow of cash to different personal financial goals, pocket allowances, emergency funds, and payments. Investing focuses on using some of your cash to contribute towards building up wealth, making compounding to work for you etc. Understand how financial planning affects our cash flows allows us to build a solid financial planning to build a solid financial plan that takes the centre stage of our financial decisions and guides the use of available money.
A portion of the cash pool accumulated over time will be used to make deposits in order to ensure enough financial management for protecting of assets and income in the form of insurance premium payments, guiding the flow of cash towards retirement funds, meeting lifestyle expenses at the same time.
If you need cash more than inflows that means you need more cash inflows beyond your income then you need to decide to rely on savings that you might have accumulated in your past or then you will have to obtain loans from creditors that means your income is falling short of your expenses this situation is a tricky situation as this lack of cash can lead you to take the burden of death. However on the other side if your income is excess of the amount that you wish to spend then you might have access funds which you can further use to fulfill the objectives of your financial plan.
How Cash Shifts My Focus On The Future?
Maintaining a adequate balance of cash in your pocket is not only a skill but is also a discipline. Getting liquidity in your pocket is more of discipline which happens when you decide where, how and when you want to spend your money, and how much of it you would keep aside for savings. Going ahead it is also about disciplining your emotions and psychological forces that can make you overspend and lead towards debt. However, if there is a strong desire to avoid debt then we must follow the discipline and can save overselves from the obligation of making debt payment and the stress related to this.
The urge to hold cash, be in liquid state, makes person to keep his/her financial goals insight. One must keep the vision of his/her future in front of him/her. Thus, all the actions, decisions or expenses made by an individual are guided by the personal financial plan, budgets, and future financial status.
When Crown Of Cash Slips?
Holding cash is great, but its crown can slip in times of inflation. In times of plunging interest rates, we find that keeping cash is not like keeping gold, but like keep sodium (which vanishes as it catches fire with oxygen in air).
Over the long run, inflation effects have been greater than the risk free interest rates for savings. This suggests that cash could only generate weak returns over the risk free interest rate.
How Much Cash Should I Keep?
Well, you must hold cash for three broad purposes. First, to keep yourself liquid. This means that you must keep cash amount to your average working capital for your personal lifestyle afloat. This would call you to keep track of your income and expenses, and then averaging the weekly requirements to understand how much you need to stack in your purse.
Second, you need cash for a rainy day. This means that you must keep a liquid account aside to fetch cash on any sad day of your life. We usually refer this to an emergency fund.
Third reason is avoidable. You should keep some cash aside to take a ride of any market opportunities to either earn or save.