statement cash flow healthy - Amazon S3 · 2012-01-30 · grand piano. It is a luxurious item to...

Copyright © MoneyAutomationSystem.com - All Rights Reserved

1

STEP 1: ANALYZE MONEY FLOW

The most important statement that shows your financial health

is not the balanced sheet or net worth statement. Even if you

have a high net worth, a negative cash flow will deplete your

accumulated wealth at the end. Therefore, it is your cash flow

statement that shows how healthy you are financially.

cash flow

statement shows how

healthy you are

financially

The first step is to start analyzing how your money flows

through your fingers. You can start by looking at your cash flow

statement. Don’t be surprised that most people don’t even have

their cash flow statement ready. How about you? Do you track

how your money flows?


2

step 1 Analyzeyour money

flow

It is an essential habit to track every ringgit you earn, save and

spend. You can use a note book, an Excel Spreadsheet, software

like Microsoft Money or a web-based application such as

Wesabe.com. You just have to start doing it now if you don’t

have your cash flow statement ready.

You need a system that determines how your money flows.

Inflow

Let’s look at the inflow

portion. Inflow of money

means all the money that flows

into your control. In simple

term, inflow is your income.

Incomes can be divided into

several categories according to

the effort needed to acquire the income.

A source of income may require your 100% effort to acquire. You

actively work to get the money. Therefore it is called the active

income.

Some income sources don’t require your active participation at

all. Therefore it is called the passive income.

inflows = incomes

$ $$

inflows = incomes

$ $$


3

Between the two, there are many income sources that don’t

need your active participation but not totally passive either. This

type of income is known as semi-passive income.

Active Income

Active income requires our

active participation to

generate.

It is the income for which

services have been performed

by you.

Here are some examples of

active incomes:

• Salaries

• Wages

• Commissions

• Profits from the food stall you operate on your own

• Any freelance job which you are paid on project basis

Let’s look at a common example. I write and maintain a personal

finance blog. When a financial institution pays me RM500 to

write about their products on my blog, that is active income.

It is because I need to spend the time and actively brainstorm,

and write down every word to review their financial products.

Furthermore, I need to edit the article. I need to format it to suit

the design of my blog. I need to login to my blog admin area and

publish the sponsored blog post.

That’s definitely active income.

active income requires your

active participation to generate

active income requires your

active participation to generate


4

Passive Income

Passive income is generated

without your active

participation.

The money is made from a

system you set up previously.

For examples:

• Profits from fast food franchise

• Rental income

• Profit from business you invested in. Your partner runs

the show and pays you dividend periodically.

• Interest earned from Fixed Deposit account

• Dividend paid from your public stock portfolio

It is the money generated when you are not actively involved.

I’ve published several blog posts that rank very high on search

engine. Many of the posts were written few years ago. When

visitors stumble upon my blog post referred from Google search

engine, they read my articles and probably click on the

advertisement displayed on the same page. Therefore, I got paid

when reader clicks on the advertisement.

The money is generated without my active participation.

Therefore, it is 100% passive. I just need to do the work once.

The money is made from the blogging system I set up

previously.

passive income is generated

without your active participation.

passive income is generated

without your active participation.


5

Semi-passive income

Because there are many

sources of income that require

minimum work, I categorize

them as semi-passive income.

It is somehow passive, but not

100% passive. You can’t just set

it up and forget about it.

For example, if you have 10 rental properties. There are some

maintenance works you need to do such as collecting rent and

answering to the tenants when problem arise.

You can further minimize the work by hiring a property

manager to do all the “dirty” works for you. Then your

participation is further reduced to merely looking at the

account, making sure that the rental is banked in to you.

As for my blog, the income generated is not 100% passive. I still

write from time to time although the frequency is much less

compared to the time I first started blogging. I still answers to

comments from readers and do some technical maintenance

works. I also make money from the affiliate products that I am

promoting. Whenever I recommend a useful and valuable

product, I would be paid commission if the readers buy the

product through my links.

I would say that most of the incomes made by the rich people

are semi-passive. Because they have lots of semi-passive

incomes, they still have much spare time to further pursue more

semi-passive incomes. The cycle goes on and on and they

become richer and richer.

Of course, you will get rich easier when you have a massive and

consistent cash inflow.

Semi-passive

income is somehow

passive,

but not

100% passive.

Semi-passive

income is somehow

passive,

but not

100% passive.


6

Outflow

Wants

Necessities LuxuriesWants

Similar to an operating business, a healthy cash flow is crucial to

the profitable operation of your own financial matters.

When the money flows into your control, it also flows out at the

same time, unavoidably.

In order to survive and maintain your current lifestyle, you use

materials, consumer products and services which must be paid

for. In other words, you simply have to spend money to live in

this modern society.

There are three areas we can spend money on.

Starting from the bottom, we spend money on “necessity”.

Moving up a bit, we spend money on “want”.

At the top, we spend money on “luxury”.

Necessities

Have you ever looked around and thought about what you

need?

For hundreds of years, it is proven that human beings only need

three basic necessities to survive: food, water and shelter.

But look around you. Nowadays, we depend on many man-made

objects and services to live comfortably.


7

In this modern world, we can

still survive on the three basic

necessities. But that’s not a life

to brag about. I know you also

need a car to drive around.

You need electricity to power

up all the electrical appliances

in your house such as TV,

light, air-conditioner, washing machine etc.

You also need a mobile phone to get connected, a home

computer and high-speed internet access.

In conclusion, necessities are those products and services you

need to live your current lifestyle. Necessity is essential and

indispensable.

For example, a young graduate needs a car to get to work on

time. A car is a necessity to him. And it can be a ten-years-old

car. A used car fulfils his need.

But he wants a new Japanese-made vehicle. He “wants” it but

not necessarily “needs” it. If he buys a new car that he simply

can’t afford yet, that’s luxury.

Luxury

Luxury is something that is an indulgence rather than a

necessity.

Luxury is something desirable but expensive.

Luxury is something very pleasant but not really needed in life.

You need a watch. But wearing a Rolex on your wrist is a luxury.

You need a house for your small family. But getting a three-

storey bungalow with built-in swimming pool is a luxury.

car is a necessity car is a necessity


8

You need a car to go around

places. But driving an Audi is a

luxury.

Believe it or not, most of us

spend a lot of money for

luxurious items.

For example, you can live with

an ordinary model of mobile phone. But you bought the iPhone.

Yes, it is a great gadget. I am not saying that you are wasting

money buying the iPhone. I love iPhone and I own one myself. I

just want you to know that it is a luxury.

Don’t feel guilty spending money on luxurious items. As long as

it is something you love and enjoy in life, it is worth the price.

When something luxurious is something that you want, it is in

fact a good thing.

Then let’s look at the thing we really “want”.

Wants

When you want something, you feel or have a desire to own it.

Please remember that having a desire for something is good!

It is the reasons for you to work harder.

It motivates you to make more money.

Often, poor people remain poor because they don’t have a

strong desire to own those luxurious items. They are satisfied

with their current situation.

Wanting something is the art of knowing which luxury will

bring you happiness.

You cannot simply chase over every luxury. There are too many

luxurious items. Choose wisely the items that you really want

and then don’t ever give up to own one for yourself!

luxury is something nice to have

but won’t give you much happiness

luxury is something nice to have

but won’t give you much happiness


9

I dream to have many musical gears in my home recording

studio. To most people, the

items I want are luxuries to

them. Driving a BMW won’t

make me as happy as playing

the latest synthesizer in my

home studio.

I recently just bought a baby

grand piano. It is a luxurious

item to most people who don’t play the piano, but grand piano

is something I am longing for since I started learning music

more than twenty years ago.

To me, it is not a necessity. It is not a luxury. But it is a want.

So, spend money wisely on necessities and wants, but not on

luxuries.

Surplus

Money flows from income sources, and through your control,

money flows towards “Spend” or “Save”.

It is utmost important to maintain a positive cash flow, meaning

you need to have surplus that allows you to save money.

You probably have read many personal finance books and heard

over and over again from financial gurus, that you should spend

less than you earn. You should live below your means. They urge

you to save at least 10% of your total income.

In my book Top Money Tips for Malaysians, I even said that if

you can save 30% of your income consistently starting now, you

will be able to achieve financial freedom in 12 years time.

I know you may be tired and bored of listening to this “old tune”

for so many times. The bottom line is that this little difference

makes all the big differences between rich and poor.

wanting something is the art of knowing

which luxury will bring you happiness

wanting something is the art of knowing

which luxury will bring you happiness


10

By flowing the money into the

“save” area, you will

ultimately increase your

income inflow. More inflow

will enable you to have a

larger portion for “save” and

also “spend” area. This will

allow you to expand your

means, live more comfortably, help more people and become

affluent.

Surplus is like recycling your money and let it flows back to you.

Surplus is meant for three main purposes –

• to create an emergency fund,

• to protect your assets and earning capability, and

• to invest for more money inflows.

Emergency

Emergency does not mean your car suddenly breaks down, a

family member falls sick or your PC just crashed. We are talking

about if you are disabled or unemployed for a few months, you

may be in an emergency situation.

So a portion of your money surplus should be channeled into

places with high liquidity.

Some gurus suggest that if you depend solely on employment

income, you should have 10% of your annual income in cash

savings.

If you are self-employed, earning commissions from selling

products, or earning a fluctuating income, then you should have

20% of your annual income in cash savings.

Some gurus also recommend that you at least save an amount of

six months expenses in cash savings.

Foundation - insurance

emergency buffer

Foundation - insurance

emergency buffer


11

No matter how, some portion

of your surplus shall be in high

liquidity accounts such as

checking and saving accounts,

or money market fund.

This emergency fund will be

very useful not just in the case

of emergency, whenever an

opportunity arises, you will have the capital ready.

Protection

Emergency fund can get you through minor turmoil. But when a

permanent and long term problem arises, such as major illness,

accidental disaster, or disablement, you need a stronger

foundation to protect your

financial house.

There is no other substitute for

this foundation except

insurance.

When disaster happens, you

can be sure that money still

flows in.

Insurance is something you can get when you don’t really need

it. At the time you need it, it is often too late to get one. So,

insurance protection must be planned ahead.

At the time your money inflow stops due to the covered event,

insurance will provide you the immediate solution.

Insurance assures your earning capability.

Insurance compensate your monetary loss.

A successful automated money flow system is always protected

by adequate insurance coverage.

When you lay a solid foundation, you will have the peace of

mind to invest.

Whenever an opportunity arises, you will have the capital ready.

Whenever an opportunity arises,

you will have the capital ready.

protection ensures that when disaster happens,

you can be sure that money still flows in

protection ensures that when disaster happens,

you can be sure that money still flows in


12

Invest

If you forgot everything I said in this chapter, just remember

this one piece of advice – “Maximize money flow for investment”

It is known that most millionaires channel at least 20% of their

income to invest.

There are two major resources we all have – time and money.

You shall invest both to get higher return of your investment.

You shall invest both to maximize your earning potential.

When you successfully invest both time and money

effectively and efficiently, you will get more money and

time in return.

“An investment in knowledge pays the best interest”

Benjamin Franklin

Investment

emergency buffer

invest

Outflows

Inflows


13

ASSIGNMENT

1. Write down any opinion, feedback or question about this topic at the comment

section below.

2. Please rate the content of this lesson and also any comments below.

statement cash flow healthy - Amazon S3 · 2012-01-30 · grand piano. It is a luxurious item to...

Documents

Transcript of statement cash flow healthy - Amazon S3 · 2012-01-30 · grand piano. It is a luxurious item to...