At some level, money is money. As long as we will have enough to meet our current and future needs, we don’t necessarily care if we make it all up front, or require regular income to make it work. In other words, the end result is often what’s truly most critical.
That being said, I think a lot of people tend to focus on meeting future needs by simply accumulating as much money as possible. To be sure, it’s generally a good thing to have more money saved. To the extent we can have more money in our accounts in our possession, we have some element of security and control over our ability to succeed in taking care of ourselves.
However, building up one’s capacity to meet future needs simply though accumulated assets is only one approach. Realistically, expenses continue on for people (and businesses) even when income slows down. Some costs are relatively fixed or at least have a floor to them, so if your income drops low enough you could have a situation where you’re draining net worth.
On a personal level, it’s something I think about going forward. You simply don’t know when certain events will happen that could impact your primary source of income, even if you have an idea that there are inherent risks throughout life. This is why I think about diversifying income through multiple streams, and mitigating risks this way. Like the old saying goes, you don’t necessarily want to put all your eggs in one basket. Having cash flow from different sources and activities provides some insulation against harsh economic or personal situations, no matter how hard to imagine they might be when things are actually going well.
Why does this matter? Well, cash flow is important! If we have negative cash flow, we can deplete savings quicker than we realize. Also, some assets are not exactly liquid assets. We saw this during the recent housing crunch, where people were unable to sell homes and saw the value of their home equity plummet or vanish. Those “assets” weren’t generating cash flow. I’d rather diversify by also including assets that would actually throw off positive cash flow.
How can one protect against cash flow issues? Here are 5 tips for managing cash flow:
1) Protect your primary source of income. Yes, there is value to diversifying as I noted above. But let’s make sure that we don’t get so caught up in multiple streams that we completely ignore the main source of income. This could apply to individuals as well as businesses, with the latter focusing on customers or big contracts.
2) Diversify. This really means different sources of cash flow that are dissimilar to your primary income. This could include real estate investments, interest/dividends, side hustles, etc. for people, and customer segments, products, and other classes for businesses.
3) Account for irregular income and expenses. Actually, this could probably be described as planning for such unpredictable income, and irregular expenses. With income, you should be prepared in a variable situation that if there have been ups and downs in the past, they might occur again in the future. With expenses, if you have one big payment due once a year, plan for it by saving 1/12 of it each month.
4) Budget. Yes, this can be boring. But at least having a high-level, skeleton view of your cash flow needs can be very helpful and in some cases eye-opening.
5) Be resourceful. Sometimes you may want to at least be aware of different options for dealing with potential cash flow issues. Really, with so many financing options for businesses and other choices for individuals, one could find money in a variety of ways.
In short, cash flow is important, and it’s smart to understand the variety of ways to manage it.