Tag Archives: Cash Flow

Cash Flow is King During Retirement

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Cash flow, or money going in and out of your household bank account, may be the most important personal financial metric for retirees. Cash flow positive retirees are financially good to go and do not worry about paying their bills.

Retirees, and their Financial advisers, often focus only on the money in side of cash flow, that is retirement income. But retirees should thoroughly evaluate the target and aim of cash flow. That is expenses or the money out side of the ledger, also.

Thus, it is essential for retirees not to skip over a thorough review of estimated retirement cash flow.

Knowledge is power. To know thyself was such an important principle that this adage was inscribed on the Temple of Apollo in Ancient Greece. When retirement savings and cash flow are on the line, do not allow stock market fear impact your investment decisions.

Reviewing expenses empowers you with information to make informed, realistic decisions. A known fear is less intimidating than an imagined, uninformed worry.

Here are some suggestions to help retirees navigate volatile markets and perform an essential cash flow assessment.

  • A cash flow management isn’t budgeting. It is a process of clarity and honesty. It helps retirees really see all their income (money in) and spending (money out). Cash flow management allows you to see what you are doing wrong (or right). Knowledge is power and financial freedom.
  • Be realistic. Health care is a huge expense, for example. So, plan realistically. Living expenses are often more than anticipated and returns on investment are never consistent. Be conservative in your estimations and assumptions.
  • Get comprehensive. Beyond the standard expenses, make sure to allot expenses for items such as continuing home repairs, occasional renovations and automobile replacement costs.
  • Don’t get lost in the weeds. It is more important to capture all the large expenses than worry about recording precise numbers. It isn’t necessary to record the past year’s expenses down to the penny.
  • Control your emotions. Retirees, like all people, are emotional. However, emotional people don’t make the best investors or managers of personal cash flow. Do not allow fear impact your investing or cash flow. As Warren Buffett said, “If you cannot control your emotions, you cannot control your emotion.”

When stocks are down and stock markets are crashing, ‘don’t watch the markets closely’ and ‘stick to your financial plan’. If you were to react to the market wild swings and all the fear everyone has when it drops, you’ll end up with less value and cash flow than you started, every time. The stock market will fluctuate up and down dramatically at times. It is not always a rational and logical place because of fear.

References:

  1. https://www.nasdaq.com/articles/cash-flow-king-when-planning-retirement-2016-08-12

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of BrowleeGlobal, LLC

© 2022 BrownleeGlobal, LLC. All rights reserved. No further distribution, reuse, or republication permitted without the written consent of BrownleeGlobal, LLC. For more from BrownleeGlobal, LLC, go to: http://www.brownleeglobal.com/.

Peter Lynch’s five rules to investing

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“If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train—and succumbing to the social pressure, often buys.” Peter Lynch

Legendary American investor Peter Lynch shared five rules everyone can follow when investing in the stock market.

Within his 13-year tenure, Lynch drove the Fidelity Magellan Fund to a 2,800% gain – averaging a 29.2% annual return. It is the best 20-year return of any mutual fund in history. He is considered the greatest money manager of all time, and he beat the market for so long through buying the right stocks.

No one can promise you Lynch’s record, but you can learn a lot from him, and you don’t need a billion-dollar portfolio to follow his rules.

https://youtu.be/6oYc3RbLO3Q

Lynch’s five rules for any investor in the stock market are listed below.

1. Know what you own

The most important rule for Lynch is that investors should know and understand the company they own.

“I’m amazed at how many people that own stocks can’t tell you, in a minute or less, why they own that particular stock,” said Lynch.

Investors need to understand the company’s operations and what they offer well enough to explain it to a 10-year-old in two minutes or less. If you can’t, you will never make money.

Lynch believes that If the company is too complicated to understand and how it adds value, then don’t buy it. “I made 10 to 15 times my money in Dunkin Donuts because I could understand it,” he said.

2. Don’t invest purely on other’s opinions

People do research in all aspects of their lives, but for some reason, they fail to do the same when deciding on what stock to buy.

People research the best car to buy, look at reviews and compare specs when buying electronics, and get travel guides when travelling to new places – But they don’t do the same due diligence when buying a stock.

“So many investors get a tip on a stock travelling on the bus, and they’ll put half of their life savings in it before sunset, and they wonder why they lose money in the stock market,” Lynch said.

He added that investors should never just buy a stock because someone says it is a great buy. Do your research.

3. Focus on the company behind the stock

There is a method to the stock market, and the company behind the stock will determine where that stock goes.

“Stocks aren’t lottery tickets, there’s no luck involved. There’s a company behind every stock; if a company does well, the stock will do well – It’s not complicated,” Lynch said.

He advises that investors look at companies that have good growth prospects and is trading at a reasonable price using financial data such as:

• Balance Sheet – No story is complete without a balance sheet check. The balance sheet will tell you about the company’s financial structure, how much debt and cash it has, and how much equity its shareholders have. A company with a lot of cash is great, as it can buy more stock, make acquisitions or pay off its debt.

  • Year-by-year earnings growth
  • Price-to-earnings ratio (P/E) – relative to historical and industry averages.
  • Debt-equity ratio
  • Dividends and payout ratios
  • Price-to-free cash flow ratio
  • Return on invested capital

4. Don’t try to predict the market

Trying to time the market is a losing battle. One thing to keep in mind is that you aren’t going to invest at the bottom. Buy stocks because you want to own the business long-term, even if the share price decreases slightly after you buy.

Instead of trying to time the bottom and throwing all your money in at once, a better strategy is gradually building your stock positions over time.

This approach spreads out your investments and allows you to buy into the market at different times at varying prices that ideally balance each other out versus investing one lump sum all at once.

This way, if you’re wrong and the stock continues to fall, you’ll be able to take advantage of the new lower prices without missing out.

“Trying to time or predict the stock market is a total waste of time because no one can do it,” Lynch said.

Corollary: Buy with a Margin of Safety: No matter how careful an investor is in valuing a company, she can never eliminate the risk of being wrong. Margin of Safety is a tool for minimizing the odds of error in an investor’s favor. Margin of Safety means never overpaying for a stock, however attractive the investment opportunity may seem. It means purchasing a company at a market price 30% or more below its intrinsic value.

5. Market crashes are great opportunities

Knowing the stock market’s history is a must if you want to be successful.

What you learn from history is that the market goes down, and it goes down a lot. In 93 years, the market has had 50 declines; once every two years, the market declines by 10%. of those 50 declines, 15 have declined by 25% or more – otherwise known as a bear market – roughly every six years.

“All you need to know is that the market is going to go down sometimes, and it’s good when it happens,” Lynch said.

“For example, if you like a stock at $14 and it drops to $6 per share, that’s great. If you understand a company, look at its balance sheet, and it’s doing well, and you’re hoping to get to $22 a share with it, $14 to $22 is terrific, but $6 to $22 is exceptional,” he added.

Declines in the stock market will always happen, and you can take advantage of them if you understand the company and know what you own.

References:

  1. https://dailyinvestor.com/finance/1921/peter-lynchs-five-rules-to-investing/

Ten Critical Investing Lessons

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Investing in assets is a great way to grow your money or to put your capital to work.

If there’s any lessons investors relearned in 2022, when investing in stocks, bonds, derivatives and real estate, it’s that the markets will be unpredictable, defy logic and offer unexpected surprises.

Sometimes investors can correctly anticipate what’s coming based on our past investing experience and macro economic information. Other times, investors are reminded no matter what they thought they knew, the market always knows better.

For these reasons, it’s important to remember you can always become a better, more patient and disciplined investor, whether you’re learning lessons the hard way, reminded of lessons you previously learned, but forgot, or learning from the good or bad experiences of others.

Here are 10 Critical investing lessons you wish you could teach your younger, novice self:

1) Personal finances first – Master and manage your personal finances first and foremost. Dealing with volatility is never easy, but it’s so much easier when your personal finances are rock-solid (no bad or debilitating debt, positive cash flow and net worth, emergency fund established). Know and strengthen your personal balance and cash flow statements. And, always have some cash on hand to take advantage of market dips and pullbacks.

2) Expect to be wrong often when investing – You’re going to be wrong when investing. You’re going to be wrong a lot. Your goal isn’t to bat 1.000 (that’s impossible). Your goal is to increase your odds of success. Even the best investors are wrong approximately 2 out of 5 times.

3) Sell slow – Don’t be in a rush to sell – It’s tempting to book a profit quickly or sell when you get scared. One investor sold MSFT at $24. Current price: $268. Selling a mega-winner early is the most expensive investing mistake you can or will make. And, don’t forget about taxes when you earn income or sell assets. Any income (or profit) you earn from selling assets is taxable. Before you sell any appreciated asset or take any income, make sure you have enough money for the taxes so that your gains will not be wiped out by taxes alone.

4) Watch the business – Watch the business, not the stock. The two are not linked at all in the short-term. But are 100% linked in the long-term. Always remember, you’re buying a piece of a business, do understand the business and how that business generates cash flow.

5) Buy quality – Capital is precious. Making money and putting money to work for you are hard. Saving it and growing it are harder. Buy the highest-quality investments you can find. Avoid everything else. When you focus on buying quality, opportunities can be found in any market whether it be up (bull) or down (bear). Thus, stick to your long-term plan of buying quality companies every month and forget about how everybody else is performing.

6) Add to winners, not losers – Add more capital to your winners, not your losers. “Winners” means the business is executing. “Losers” means the business isn’t. Add to the best companies you can find at better and better value points.

7) Patience above all – Your biggest edge and investing super power is patience. Don’t waste it. Compounding over the long term is the greatest power of investing. Your holding period for an investment asset should be measured is in decades, not days.

8) Do nothing is usually correct – “Do nothing” (being a long term investor) sounds easy, until you start investing your capital. Investing should be more like watching paint dry than a Las Vegas casino. More often than not, it’s the correct thing to do. Ninety-nine percent of good investing is doing nothing. It’s essential to ignore the noise and the hysteria of Mr. Market. Never Let Short-Term Volatility Dictate Your Long-Term Investment Decisions.

9) Learn valuation – Know what valuation metrics matter and when they matter. P/E Ratio is great, but it’s not universally applicable, and it only works when a company is in mature (stage 4). Consider ROIC, P/FCF, and P/Sales. Remember: Every investment is the present value of all future cash flow.

10) Network with others – Connect with other trusted long-term investors and experts. A good community is worth its weight in gold. Especially when bear markets appear.

Final thought: Have a plan – A financial plan is paramount to your financial success. During periods of volatility, you often hear that investors should “stay the course”, but there is not a course to stay without having a comprehensive financial plan.

The plan should be based upon your goals, values, purpose and dreams for the future, short and long term. It is a roadmap for your financial future and it should provide a guide for how you invest. The plan should also address other areas such as retirement planning, estate planning, risk management, asset allocation review, and cash flow planning.

In all things, be grateful! Appreciate and be grateful for all aspects for your current life and the abundance of opportunities. Gratitude influences your state of mind, your behavior, your relationships and your perspective on the world.

Roman philosopher Cicero said that, “Gratitude is not only the greatest of the virtues but the parent of all the others.”

Source: Brian Feroldi, 10 Critical Investing Lessons, Twitter, June 25, 2022.

The Power of Dividends

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Dividends account for about 40% of total stock market return over time

Value of dividends

There are 2 ways to make money in the stock market: capital appreciation and dividends.

Capital appreciation—an increase in a stock’s price—gets most of the attention, but dividends can be surprisingly powerful.

Fidelity Investments’ research finds that dividend payments have accounted for approximately 40% of the overall stock market’s return since 1930.

What’s more, dividends can help prop up returns when stock prices struggle. For example, stock prices in the S&P 500 fell during the 1930s and 2000s, but dividends almost completely offset the decline. In the 1940s and 1970s, when inflation surged, dividends accounted for 65% and 71% of the S&P 500’s return, respectively.

“From a multi-asset income perspective, I am always seeking investments that pay a high enough level of current income to help cushion the blow during down markets. Conversely, in rising markets, this income component contributes to the overall total return of the investment. In this regard, companies that pay a sustainable and growing dividend have the potential to grow their income to keep up with inflation,” says Adam Kramer, portfolio manager for the Fidelity Multi-Asset Income Fund

References:

  1. https://www.fidelity.com/learning-center/trading-investing/inflation-and-dividend-stocks

Power of Dividends

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A dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend.

Dividends can create a rising source of income for a lifetime. They have proven to grow at twice the rate of inflation over the better part of stock market history.

Dividends are one of three ways for a company to return value of their profits and a portion of its free cash flow to shareholders. The other two ways are for a company to buy back its shares and to re-invest in the company.

  • A share buyback is when a company uses cash on the balance sheet to repurchase shares in the open market. This has two effects.
      • It returns cash to shareholders
      It reduces the number of shares outstanding.

    As a company increase the dividend on a annual basis, the amount may be small, but over time, it can become significant.

    For example, if you own stock in a company that pays a dividend of 57 cents per share, they may announce a dividend increase of 4 cents to 61 cents. That means you get and extra 4 cents for each share you own.

    Although, it’s only 4 cents, but 4 cents on 57 cents is am7% dividend increase on each share you own. If the dividend increased by this amount, 4 cents, every year, the dividend would double in about 10 years. Thus, over time, if you stick with dividends, the money will begin to grow.

    In S&P 500 Index companies alone paid out $485 billion in dividends to shareholders.

    Dividends outpace inflation

    Back in 1980, a $10,000 investment in the S&P 500 Index paid a dividend of about $421, or 4.21%, on the initial investment. Forty years later, the dividend income had climbed to $5,724, a 57% annual yield on the original investment. And, the original $10K investment grew as well. The original $10K invested in the S&P 500 Index in 1980 would have grown into more than $287K as the stock price increased. That’s not counting the dividends paid.

    The price-only-return (which excludes dividends income) is 8.75% per year. If you add in another 3% for the dividends you receive each year, you get a total average return of about 11.75% per year.

    Dividends have proven to be a more consistent source of growing income that has outpaced inflation.

    Dividends and Total Return over that 40 year period,

    Total return is one of the most important concepts in finance, and it involves more than just the dividends a company pays out.

    The total return of a stock is the total amount your investment changes in value, calculated by adding the amount of dividend or interest income received to the investment’s capital return (i.e. change in the investment’s price).

    Total return is driven by three components: earnings growth (which fuels capital gains and the underlying intrinsic value of a stock), dividends, and changes in valuation multiples.

    Dividends have been a major component of the stock market’s overall total returns throughout history and have contributed anywhere from 25% to 75% of the market’s overall total return over the past seven decades (the remaining portion of total return is accounted for by capital gains, or the market’s change in price).

    Takeaway, dividends are a powerful wealth building tool. If you invest in perennial dividend payers and consistent dividend grower companies, and then be patient, the dividends will add up significantly over decades.

    References:

    1. https://corporatefinanceinstitute.com/resources/knowledge/finance/dividend/
    2. https://www.wesmoss.com/news/the-power-of-investing-in-dividends-generating-income-from-stock-dividends-vs-bond-interest/
    3. https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/paying-back-your-shareholders
    4. https://1.simplysafedividends.com/dividends-vs-total-returns/

    4 Steps to Build, Manage and Preserve Wealth

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    The requirements for building, managing and preserving wealth are simple, mundane and practical, if you choose to pursue it. The requirements are:

    • Commitment so that you prioritize the steps, habits and behaviors necessary to build wealth; otherwise, life will just get in the way.
    • Planning and creating systems based on proven principles and strategies that actually work.
    • Action because nothing happens without persistent, disciplined action over the long term to reach the your wealth goals.

    What is “Wealth-Building?”

    Wealth building is the process of generating long-term income through multiple sources. The sources includes savings, investments, and any income-generating assets. The wealth building definition requires proper financial behaviors, planning and goal,setting. Many individuals turn to wealth building as a way to achieve financial freedom and acquire cash flow to fund their lifestyle and retirement.

    The 4 Steps to Building, Managing and Preserving Wealth

    To build wealth, you must follow four simple steps: make money, save money, invest money and manage cash flow. Before investing, it is essential to have a reliable source of income. After securing a reliable source of income, it is recommended save regularly and paying yourself first. Finally, it is time to invest in assists and manage your cash flow.

    1. Making Money

    This step may seem obvious and is fundamental to wealth-building. A small amount of regular savings from your income can compound into a substantial amount. An important question to ask yourself is whether or not your current job can provide you with a regular amount of savings for 40 to 50 years. If not, it may be time to look for ways to increase your income.

    The two basic types of income are earned and passive. Earned income comes from your employment, while passive income comes from investments. To increase your earned income, you may first have to make changes in your occupation. Consider investing in your education and other forms of training to help you become a stronger candidate for your desired job.

    2. Saving Money

    The second key to wealth-building is setting aside a portion of your earned income regularly. Once you have saved enough, you can start investing to grow passive income. Here are a few ways to to start saving money:

    • Keep track of your spending each month, and then eliminate the spending that you don’t need or does not align with your values
    • Adjust your budget to the point in which you’re saving every month.
    • Always have about 6 months’ worth of expenses saved in case of emergencies. Having a cushion will help prevent you from derailing your finances every time something unexpected happens.
    • Contribute to your retirement plan. If your employer offers a matching plan, definitely take advantage of it. Don’t leave free money on the table.

    3. Investing Money

    Once you have saved, you can start investing your money. However, to build a diverse investment portfolio, you will have to take a few risks. It is important to research how much asset allocation is appropriate for you. While you can do this research yourself, using a financial advisor is also recommended for new investors. They can help you gain clarity on your investment goals, time horizon, and how much risk you can stomach. Based on these insights, they can help you build a diversified portfolio that is risk-averse, moderate, or aggressive, based on your preferences.

    4. Managing Cash Flow

    Cash flow is king!

    Your net worth, which is how wealth is measured, is an extremely important factor in wealth building. However, to live the lifestyle of your dreams, you must be able to generate positive cash flow from your wealth.

    Cash flow is defined as income (cash in) minus expenses (cash out). And, the simpler your lifestyle and the better you manage your spending and expenses, the less income is required from your investments to live the life of your dreams and to achieve financial freedom.

    To create a wealth building system, you can establish long term investing strategy and portfolio, and achieve financial freedom. Choosing the right wealth building assets comes down to which opportunities best suit your financial goals. With the right planning, investors can be well on their way to building, managing and preserving wealth.

    In short, successful building, managing and preserving wealth are necessary requirements to achieve financial freedom. And, financial freedom buys you time and with time you can discover and experience what you really want out of life.

    References:

    1. https://financialmentor.com/category/wealth-building/wealth-program-system
    2. https://www.fortunebuilders.com/wealth-building-assets/

    Inflation…the Enemy of Savers

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    Inflation is the enemy of those who save.

    For most of the 21st century, savers and investors have experienced a favorable period of relative low inflation stock market growth. In fact, the average annual inflation rate from 2000 through 2021 was 2.31%. Even with that “low” inflation rate, the proverbial uninvested dollar hidden under one’s mattress in the year 2000 would be worth a mere $0.62 today.

    With inflation approaching 7% in late 2021, we’re on the precipice of witnessing the rapid erosion in the value of the dollar which will create substantial risk for ordinary savers and ultra conservative investors. Keeping your money in a savings account, money market or CDs is failing to protect it from inflation.

    Instead, the best place to invest is in the economy. While large sums of money are generally required to purchase real estate or a small business, the stock market allows those with limited capital a means to invest regularly in a wide variety of businesses and benefit from the strength of the economy.

    The equity markets have a history of robust returns over the long run. Over the last one hundred years, the average annual stock market return is 10%. That means investors who stay invested are nearly doubling their investments every seven years.

    Some individuals view the stock market as too risky and they literally view investing in the market as “gambling”. But, when you choose to use less “risky” investments like bonds rather than investing in stocks, the results vary great.

    A study by NYU’s Stern School of Business gives insights into historical returns provided by an investment in U.S. Treasury bonds as opposed to corporate bonds and the S&P 500.

    Assume an investor received a $300 inheritance on the day he was born. On that date, his parents invested $100 (the inflation-adjusted equivalent of $1,630 today) in several asset classes in 1928.

    As of September of 2021, the above investor would have $8,920.90 in U.S. Treasury bonds, $53,736.50 from corporate bonds, and $592,868 in returns from an index fund that tracked the S&P 500.

    Obviously, the stock market beats “safe” investments. While bonds might play an important role in a balanced portfolio, a 100% bond portfolio will fail to achieve the investment goals for most.

    Investing a little now is better than a lot later

    “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

    A strong argument can be made that the amount of time one is in the market is of more importance than the sum invested in stocks.

    Consistently timing the market is impossible. There literally is no human being who can claim that he or she has been successful at that task with any degree of honesty. However, timing the market is not only unachievable, attempting to time the market can lead to poor investment returns.

    Over time, this would result in an ever-falling income stream. You spent your life buying stocks because they are a great source of return, that doesn’t stop just because you retire! The market is still the best source of future returns, you should be continuing to buy more, not sell!

    If one largely invests in stocks with yields of 5% or more, you can receive a substantial annual income without cannibalizing your portfolio. Furthermore, if the average annual market return is 10%, a stock that yields in the high single digits does not need to appreciate markedly to provide market-beating returns.

    Higher yield stocks outperform more often. They distribute cash on a recurring basis, whether share prices are up or down. Prices are volatile, and at the whims of emotional investors, dividends are the profit generated by the business and distributed to shareholders.

    Any investor with an employer with matching contributions should take full advantage of that opportunity. Any investor with an employer with matching contributions should take full advantage of that opportunity.

    By investing in dividend-bearing stocks and resisting the temptation to time the markets, you can be well on your way to building wealth and achieving financial freedom.

    References:

    1. https://seekingalpha.com/article/4484316-retirement-what-novice-investors-must-know

    9 Good Financial and Wealth Building Habits

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    Developing good financial habits is pivotal to maintaining a healthy financial life. It can be the most important tool you have to reach your goal of eliminating personal debt. Regardless of any bad money habits you’ve had in the past, there’s always time to make changes for the future.

    When adjusting your approach, don’t hesitate to learn from others. This could be the difference between success and continuing down the same old path.

    Below are nine good financial habits.

    1. Create a budget.

    The median household income in the United States in 2019 was $68,703. Whether you earn more or less than this, a budget can help keep your finances on track.

    When you know how much you earn, it’s much easier to determine how much you can comfortably spend each month.

    2. Avoid or consolidate higher-interest credit card and personal debt.

    Unexpected expenses can come up and we don’t always have the cash to pay for them. So we might swipe a credit card or take out a loan.

    The good news is you may be able to consolidate your higher-interest debt with a fixed rate personal loan, saving time and interest costs.

    If you’re paying a high interest rate on debt, and you had the opportunity to pay a lower rate that might lessen your monthly payment, why wouldn’t you?

    3. Understand your financial circumstances.

    You need to understand every aspect of your financial situation. From how much you earn to how you’re spending your money, every last detail is important.

    With an understanding of your finances, you’ll always know what makes the most sense for you and your money.

    4. Learn from past mistakes and failures.

    Learning from you past mistakes is one of the most critical money habits you can form. Even the most successful people make financial mistakes from time to time. For example, maybe you buried yourself in store card debt. Or maybe you “bit off more than you could chew” with a car loan.

    It’s okay to make financial mistakes, as long as you learn from them and use what you learn to manage your debt.

    5. Set goals and create a plan .

    Have you set both short- and long-term financial goals? Are you tracking your progress, month in and month out?

    Taking this one step further, you can do more than think about goals in your head. See where putting your goals to paper takes you. You could get a new sense of clarity and focus with everything written out in front of you.

    According to a research study completed by Gail Matthews at Dominican University, people who write down their goals accomplish “significantly more.”

    6. Ask questions.

    Although you know your financial situation better than anyone else, there are times when it makes sense to ask questions.

    For example, a CPA can provide guidance related to your tax situation. With more than 658,000 of these professionals in the United States alone, there are plenty of options for advisement.

    7. Save for retirement.

    Many Americans carry debt and find it difficult to save money. These challenges can make it hard to pay attention to retirement savings. In fact, a recent Employee Benefit Research Institute survey found a majority of people saying debt may be a hindrance to their retirement plans.

    You won’t be alone if you opt against saving for retirement, but if comfortable retirement is one of your goals, look towards the future. Putting a bit of money away for retirement is a good financial habit; consolidating higher-interest debt so that you save money on interest may be one way to find more savings opportunities.

    8. Automate your savings.

    There are many reasons why people may not save as much money as they should. For example, they may touch every bit of money they earn, meaning it never ends up in the right place.

    Protect against this by automating savings. Think about it like this: you can’t spend money that you don’t see or touch.

    9. Pay down debt.

    Taking on debt can be a successful strategy as long as you’re comfortable with two things:

    • The monthly payment
    • Your ability (and willingness) to pay down the debt.

    The longer you let debt linger the more you’ll pay in interest. Furthermore, debt can hold you back from reaching other goals, such as saving for retirement.

    If you implement these nine good financial habits, you may end up feeling better about your current situation and what the future will bring.

    Creating a wealth plan

    A well thought out wealth plan rests on three essential pillars:

    • Save
    • Invest
    • Repeat

    These are the core principles of every wealth plan. Disregarding even one will render a wealth plan useless. An important aspect to consider is that a wealth plan should be tailored to each individual’s needs and goals. So pay attention, and make sure that these simple steps are followed in order to create a wealth plan that allows individuals to achieve their dreams of building wealth and financial freedom.

    A wealth plan is a resource to help you achieve your financial goals. As it allows you to plan, and use it as a guide throughout your journey. However, having a wealth plan is not a guarantee of anything.

    Achieving wealth is like building a house. Thus, having the best architectural design will not ensure that the final product will be outstanding. This is why execution is the differentiating factor in achieving wealth. There are certainly several advantages to having a well-thought-out plan to help you in this process, such as:

    • Clear vision over goals
    • Easily control expenses and estimate savings
    • Automate investments
    • Define a strategy to achieve wealth
    • Adapt your strategy over time

    In essence, a wealth plan acts as a roadmap to financial freedom. The main difference is a map usually has a clear path towards a destination. A wealth plan, on the other hand, is filled with unknowns and obstacles that may lay ahead.

    In essence, a wealth plan acts as a roadmap to financial freedom.

    References:

    1. https://www.discover.com/personal-loans/resources/consolidate-debt/good-financial-habits/
    2. https://goodmenproject.com/featured-content/how-to-create-a-wealth-plan-get-started-now/

    Free Cash Flow

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    Free cash flow is the amount of leftover money in a company.

    Cash flow is simply the difference between money coming in versus the money going out. It is arguably the most important financial metric for evaluating a person’s or company’s financial worth or intrinsic value.

    Free cash flow (FCF) is the amount of cash (operating cash flow) which remains in a business after all expenditures (debts, expenses, employees, fixed assets, plant, rent etc.) have been paid. Free cash flow represents a company’s current cash value.

    Cash Flow Versus Free Cash Flow

    • Cash flow is the flow of cash coming in and going out of a business over a certain period of time. It is presented in a cash flow statement.
    • Free cash flow represents the amount of disposable cash in a business (remaining after all expenditures). Sometimes, free cash flow is considered to be a company’s current cash value. Though, since it does not take into consideration a business’s growth potential, it is not normally considered a business valuation.

    Free cash flow is the amount of cash that a company can put aside after it has paid all of its expenses at the end of an accounting period. It is an important measurement of the unconstrained cash flow of the company. It measures a company’s ability to generate internal growth and to return profits to shareholders.

    Calculation of Free Cash Flow

    FCF is simply a company’s operating cash flow (OCF) minus capital expenditures (CapEx). FCF represents how much money a company has after being free from its obligations.

    • Free cash flow = Net cash flow from operating activities – capital expenditures – dividends

    Positive free cash flow means that a company has done a good job of managing its cash. If free cash flow is negative then the company may have to look for other sources of funding such as issuing additional shares or debt financing.

    Negative free cash flow is not necessarily an indication of a bad company, however, since many young companies put a lot of their cash into investments, which diminishes their free cash flow. But if a company is spending so much cash, it should have a good reason for doing so and it should be earning a sufficiently high rate of return on its investments.

    Free cash flow can be used to expand operations, bring on additional employees or invest in additional assets, and it can be put toward acquisitions or paid out in dividends to shareholders or used to buyback company’s shares.

    References:

    1. https://strategiccfo.com/free-cash-flow-analysis/
    2. https://www.growthforce.com/blog/free-cash-flow-what-does-it-mean-for-business-growth

    Budgeting 50-30-20 Strategy and Cash Flow

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    Managing your money and tracking your finances is essential in building wealth, but it doesn’t have to be complicated or painful process. It can be as simple as creating a budget. And, a budget starts with listing of your income and your expenses.

    One simple strategy for tracking your personal cash flow (income and expenses) is the 50-30-20 budgeting strategy. With this budgeting strategy, you divide your income into three broad categories: necessities, wants, and savings and investments, according to those ratios.

    —- 50% of your income should go toward things you need

    This category includes all of your essential costs, such as rent, mortgage payments, food, utilities, health insurance, debt payments and car payments.

    If your necessary expenses take up more than half of your income, you may need to cut costs or dip into your wants fund.

    —- 20% of your income should go toward savings and investments

    This category includes liquid savings, like an emergency fund; retirement savings, such as a 401(k) or Roth IRA; and any other investments, such as a brokerage account.

    Experts typically recommend aiming to have enough cash in your emergency fund to cover between three and six months worth of living expenses. Some also suggest building up your emergency savings first, but, you don’t just want to save this money.

    You want to invest it and make it work for you. That means contributing to your employer’s 401(k) plan if they offer one or saving in other retirement accounts, such as a Roth IRA or traditional IRA.

    —- 30% of your income should go toward things you want

    This final category includes anything that isn’t considered an essential cost, such as travel, subscriptions, dining out, shopping and fun.

    This category can also include luxury upgrades: If you purchase a nicer car instead of a less expensive one, for example, that dips into your wants category.

    But think about what matters to you before spending this money. As research shows, how you spend is oftentimes more important than your overall income or the amount you spend in total.

    Money experts suggest you spend on experiences, such as trips or classes, rather than things. “All of the best psychological research on money and happiness tell us that spending money on experiences brings more (and more lasting) happiness than spending money on material objects,” says Ron Lieber, New York Times columnist and author.

    There isn’t a one-size-fits-all approach to money management, but the 50-30-20 plan can be a good place to start if you’re new to budgeting and are wondering how to divide up your income.

    References:

    1. https://www.cnbc.com/2021/06/25/best-free-budgeting-tools-2021-how-to-make-your-own-spreadsheet.html
    2. https://www.cnbc.com/2021/05/11/how-to-follow-the-50-30-20-budgeting-strategy.html
    3. https://www.cnbc.com/2019/07/22/use-the-50-30-20-formula-to-figure-out-how-much-you-should-save.html