In the first article in this series, I outlined the four steps that I think make up your financial planning journey, namely:
Step 1: Take stock of where you are. What is your starting point?
Step 2: Establish your goals and objectives. Where are you going?
Step 3: Make plans to increase your cash flow margin. How can you get to your destination the quickest?
Step 4: Control your cash flow. Stick to your planned route.
I then covered the first two steps in articles following that so feel free to read those before you read this article on step 3.
By the time we reach step 3, we should have a very good idea of what our starting point is as well as what our destination and pitstops are, so now we need to plan our route so that we can reach our destination in the quickest way possible, but what exactly does that mean and how do we do that?
Step 3 is all about increasing your cash flow margin. You cash flow margin is the difference between your income and your expenses. This difference is what is used to invest in your goals so the bigger you can get your margin, the more you can invest in your goals which means the quicker you can achieve them.
There are essentially only two ways to increase your cash flow margin:
- Decrease your expenses
- Increase your income
When it comes to decreasing your expenses the most practical approach would be to set up a budget. (We have a free template under our resources tab on our website) Using your expense tracker from step 1, see where you are able to make some changes to cut back on your expenses. Don’t underestimate the power of small changes. Even if you can only cut back by a total of R100 in the first month and then by R150 in the second month, you are still making progress.
Also keep in mind that it is easier to decrease a lot of expenses by a smaller amount than to decrease one expense by a big amount. For example, if you decrease your spending on groceries, take-aways and clothing by R100 each, you save R300 a month and you won’t really feel the impact as significantly as if you decrease your spending on take-aways by the full R300. After completing step 1, you should also be more aware of all the unnecessary spending (like take-away coffee for example) that takes place and just cutting down on these expenses can help to increase your cash flow margin significantly.
Once you have cut back on your expenses as much as possible, the only thing left to do to increase your cash flow margin is to increase your income. I am a big advocate for having multiple streams of income and I think Covid-19 has reinforced the need for this. There are so many ways to increase your income and the first thing you need to determine is if you have capacity to have an “actively-managed” income stream or if you are at full capacity and therefore need to rely on passive income.
An example of an actively-managed income stream would be a side hustle. This can be anything that you can do aside from your regular job, but don’t underestimate the ability of a side hustle to grow into your main source of income. Examples of side hustles are selling lunches in your office, teaching online, selling homemade items like earrings, clothes, paintings, picture frames and other décor pieces, Airbnb or even house sitting or dog walking. There are endless possibilities when it comes to side hustles, you just need to be creative and use the skills that you have.
Passive income is something that I strongly recommend everyone to have. It provides a bit of a safety net if things go wrong and it is a great way to increase your cash flow margin. Passive income is generally income received from investments in the form of interest, dividends or rental income. I understand that investing can seem very risky, but you need to invest with a long-term vision as over a longer period, the stock market has always recovered.
Once you have increased your cash flow margin, start using that margin to work towards your goals. Your first goal may be to have an emergency savings account with a balance of 3-6 months’ expenses so you would then put your full margin into a savings account for this purpose. You might be working towards two goals simultaneously, for example the emergency savings account and paying off your debt. In this case, you could split your margin between your two goals. Once your debt is paid off, it will also increase your margin as your monthly repayment will no longer be included in your expenses.
There is no rule when it comes to how to use your margin, it is entirely up to you. You may even choose to invest it for the first few months so that you can increase your margin quicker. Your financial journey is unique and personal and it shouldn’t be compared with anyone else’s.
If you would like some assistance when setting up your budget, please get in contact. Feel free to also go read some of my previous posts on budgeting as well as go watch some of our YouTube videos.