Why Cashflow is the Cornerstone of Wealth ?

To continue from where we left off last week…..

Cash Is King

Ask yourself this question – who is most important? You? Or the banks? IRB? The hypermarts? The shops? Some of us may not realize this; but we pay everybody else first and ourselves last. Why? Are we not important? Do we not deserve to be paid first? To quote ‘The Richest Man in Babylon by George S. Clason’ – ‘a tenth of all I earn is mine to keep’. When we have consistently saved 10% over the months; we have unknowingly formed the habit of savings. We learn to manage our expenses and budget and make choices between what must be satisfied and what must be delayed. The best part is, we are none the worse from it. This is the opportunity cost that we pay for a better future. We must make the savings plan an automatic one; so that we do it as easily as we breathe. Difficult? Not really. The choice, my friends, is yours to make.

Second most common reaction will now be to use part of our savings to make ends meet. This is another very crucial point that we must heed. We must not eat the children and grand children and great grandchildren of our $$$ soldiers. If we break the chain of compound interest; how do we expect money to serve us in our future years?

I think Benjamin Franklin said it best ‘Money is a prolific generating nature. Money can beget money, and its offspring can beget more’. Have you truly appreciated the value of compound interest? Albert Einstein called it the eighth wonder of the world. Is compound interest a secret? Why do we not understand this? Simply because compound interest is not the result; it is the process. And we can’t have an end result; if we do not go through the process.

Financial Success and Cashflow

Financial success can only be attained after we overcome the savings inertia. Once the savings habit is formed and compounding kicks in; we see the growth in a geometric progression. Now I want to introduce a very simple but interesting rule for us non-math geeks to understand i.e. the Rule of 72. This rule simply states that if we divide 72 by a given rate of return; and viola! We have the number of years required for our savings or investments to double.

For instance:-

RM 1000 —————————————————————————————————————————————— RM 2000

In a Savings account @ 2.0% p.a. ————————————————————— will require 36 years

In an FD account @ 3.6% p.a. ——————————————————— will require 20 years

In an investment vehicle @ 7.2% p.a. ——————————– will require 10years

In an investment vehicle @ 10.0% p.a. ————- will require 7.2years

How about an investment of 20% p.a.?? It will take 3.6years to double. If approximately we can double in every 4 years; in 20years, our RM 1000 would have grown into RM 32,000 instead of RM 2000; if left in the FD account. And if compared to the savings account for 36years; that same RM 1000 would have grown to RM 512,000. Don’t believe me? Use the calculator and count for yourself.

Is 20% possible? I would not say it is impossible. Think about the interest rate you pay for your overdue credit card debt. 1.5% / month works out to be an astounding 19.56%p.a.! Is this not close to 20%? If finding a savings / investment vehicle that pays 20%p.a. is ssssooooo difficult, we have no business to be paying the credit card debt of 19.56%!

Now the million dollar question – is credit card a bane or a boon? It depends on the purpose you use it for.  Remember how money evolved? First we had the barter trade. Then came money. If we go back in history, we will see that salt and precious metals etc. was used as money. So money is a medium of exchange. Now we have dollar bills and coins; and these are slowly being replaced by plastic cards i.e. credit cards; debit cards and charge cards.

By charging on the cards; is this a necessity? Is this part of my budgeted expenses? Is this an emergency? If not; why then am I spending money that I don’t have? Or money that I have not accounted for? By using the card recklessly; we not only jeopardize our financial future but literally our lives. How? If you’re in credit card debt (remember at 19.56%p.a.) and this amount starts to balloon – how does it affect your nights? Your relationships? Your career? Your business? Does it affect your life? DEFINITELY! Not for the better, I might add.

Credit card is a two-edge sword. It can be your friend and it can be your foe. Use it for necessities and expenses that you have budgeted for and have to make i.e. utilities; insurance payments etc. Not for impulse buying nor for luxury items as majority of us can go overboard if we are not disciplined. Better yet, use those cards that give you a cash rebate. Seriously people; how many toasters, hair-dryers, pots and pans that we need? Remember Cash is King! And that’s why Cashflow is Important!

I hope you enjoyed my sharing. If you enjoyed the article, please like it ! and share with your friends. I look forward to your comments.

Cheers!

Belinda Ong

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