There is so much discussion out there on the internet about picking stocks, bonds, exchange traded funds, and mutual funds. It’s dizzying to sort through the thousands of articles to really ascertain whether indexing is better than active or value is better than growth. When you think about building wealth, the discussion centers primarily around ‘asset management’, and which assets categories to own to grow your overall net worth. However, being an expert in the X and Y generation, the next 20 years of financial planning should be much more centered about your ‘cash flow management’ rather than your ‘asset management’.
Since we have moved to a society where largely all transactions move through some sort of electronic currency. For most of you that means debit or credit cards, although we know that many forms of mobile financial technology are developing to easily allow two entities or people to transfer cash to one another. Rarely do people write checks today and cash seems to only be used when the establishment says ‘cash only’. Given the pace of life for wealthy households, the number one issue I see among families earning more than $100,000 is that they have lost all transparency over their inflows and outflows with their cash. Attempt to use the word reconcile and most X and Y families think that word means making up after a fight over how many Amazon packages came last week, and not what we used to know as balancing your bank balance.
The quick and dirty word that nobody wants to talk about is BUDGET! Budget is the one word that can rapidly escalate a fire between two partners. So I like the word cleanse. This means getting right to the hard of finding out whether or not you are paying more for a service than you should be rather than break out an excel spreadsheet that you’ll never plan to use. Here are five quick things you can do to cleanse out your budget over the next five days.
- Cable & Internet – Call the customer retention department. Tell them you want the initial deal you signed up for (which probably expired or ask them what is the best deal they can offer you now to reduce your bill or you will be leaving.
- Mobile Phone – Don’t wait for your next renewal. Isn’t it ironic at renewal time how the mobile phone company magically has a better deal on your family plan? Go in this week and ask them for the best data, text, and talking plan they have for your family.
- Groceries – We recently did a study at oXYGen and the average family goes to the grocery store 11 times a month. Try to go only weekly for one month with a list and your bills will get cut in half.
- Credit Card – Review for recurring charges you don’t use any more or don’t need any more. Odds are you don’t read your monthly credit card statement and you’ll find at least one you can knock off the list.
- Home & Auto Insurance – If you have a cash reserve, check the price differential by increasing your deductibles on the policy. The math should work to your favor and this is the reason you have a cash reserve.
According to the Millionaire Next Door authors Danko and Stanly, one formula you can use to judge net worth is Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be. The reason you may not be at this level has nothing to do with your ability to manage your assets, but instead your inability to manage your cash flow. It might be time to take a peek under your hood and cleanse out your monthly budget.