Stabilizing is simply the art of balancing your personal cash flow statement. For many, this first step toward building generational wealth will be the most challenging. Stabilizing can take lots of discipline, lots of time, and might require a mindset shift. It’s also the only step that might require significant sacrifices. In this blog post, I provide two main steps to get you through our first step of ten to building generational wealth: Stabilize.
Step 1: Assess Your Current Cash Flow situation
The first step toward stabilization is to assess your current cash flow situation, or to create a personalized cash flow statement.
A cash flow statement is merely documentation of your income subtracted by your expenses. The goal of stabilization is to have your income consistently higher than your expenses so that the cash flow statement results in a net positive (>0) number. Sounds easy, right? Not always.
For most people, it’s easiest to look at your cash flow statement from a monthly level. However, one month’s information can be misleading and does not necessarily indicate a trend. Instead, create a monthly cash flow statement for at least three months and then take the average for all of your numbers to get a more accurate personalize cash flow statement. This is where technology can be used as an aid. Popular apps like Mint and Empower can be great for tracking your income and expenses over time. Some people prefer to use Microsoft Excel, and others prefer to create their cash flow statement the old fashion way by hand. Pick the method that you feel works best for you and you get the most satisfaction working with. You should have a solid and healthy relationship with the platform you keep your personalized cash flow statement on.
Some tips on creating your personalized cash flow statement:
First, make sure to use your actual after-tax take home income.
If you are employed by a company, this is easy because taxes are typically withheld. However, if you are self employed or your income is from a side-job, you will likely need to account for the taxes you might owe later down the road. If this is a case, take a percentage of your income into account for your cash flow statement (i.e. 80%).
Second, organize your expenses into Needs, Wants, & Waste.
Some examples of needs might include food, shelter, or insurance. Examples of Wants might be golf, travel, or getting drinks with friends. Examples of Waste might include a subscription for something you don’t use, money spent on food you don’t eat, or spending on habits that don’t bring you joy. These definitions of Needs, Wants & Waste are loose definitions and might look a bit different for everyone. Develop your own definitions and stick to them. This is where stabilization is somewhat of an art rather than a perfect science. Categorizing your expenses in this way will help you know where to adjust if the cash flow statement indicates that you need to.
Third, be brutally honest with yourself.
This cash flow statement isn’t for anyone else. If you cheat on your numbers, you are only cheating yourself. Typically, the numbers don’t lie. If you look back at your 6-month trend and see you spend >$1000 month on drinks with your friends, don’t toss it up to an excuse like, “a lot of my friends had birthdays during these last few months and I usually don’t spend this much.” Rather, just accept that it’s okay and put the actual number into your cash flow statement. Approach this cash flow statement exercise from a place of non-judgement to yourself. We’re all human beings that tend to live in the moment and spend past our limits. Just remember that the more accurate the numbers in your personal cash flow statement are, the more realistically you will be able to stabilize.
Fourth, for the purposes of this initial personalized cash flow statement, leave out any savings or debt repayments that you do.
If you save regularly into a savings account or maybe a retirement account, leave that out for now. If you make monthly payments toward your student loans or credit card loans, leave out your payments for now. We want to get to the essence of how much you can comfortably save or allocate toward debt. We will build back in your current monthly savings or debt repayments in Steps 2, 3 and 4.
Step Two: Evaluate
Once you have created your personalized cash flow statement and have monitored the trends for at least 3 months, you are ready to evaluate. The first number to look at is your average net cash flow. This is the average of each month’s simple equation of Income minus Expenses. What’s the average?
If the average is a positive number, you are in pretty good shape.
If you have a positive net cash flow every month you are effectively stable. However, I would still comb through your cash flow statement for potential opportunities for improvement.
First, on the income side: how can you pursue more income? Maybe, there are opportunities through your job, maybe you add a “side hustle,” or maybe you use some of the assets you have to create passive income (i.e. rental income, annuity income, etc.). Next, look at your categorized expenses.
Under the Needs section, you probably won’t make many changes, but see if there are ways to save a few dollars here and there on those necessary expenses.
Under the Wants section, look for opportunities to pursue your wants in less expensive ways. For example if you love traveling but spend a lot on it, maybe look at vacationing in places where your dollar takes you further. Because your cash flow statement is already positive, you shouldn’t feel pressured to make too many sacrifices, but have some courage and see if you can make a few changes to improve your monthly cash flow.
Under the Waste section, your objective should be simple. Cut those expenses out and see if you can eliminate them by the next time you review your personalized cash flow statement.
Once you’ve finished this in depth evaluation, make sure to implement the opportunities for improvement right away. All too often, we look at our budget, notice trends we don’t like, then do nothing and repeat the trends over and over.
Lastly, set a reminder to evaluate your personal cash flow statement again in one year.
If your average net cash flow is zero or negative, no worries!
There’s nothing wrong with you or your cash flow statement. This just means that you have some work to do in order to stabilize.
First, take a look at the income side. Are there opportunities to improve your income? Maybe there are opportunities through your job, or maybe you have to seek out a new job that pays more. Consider adding a “side hustle” or using your assets to create passive income.
Next, take a look at your categorized expenses.
Under the Needs section, it might be tough to make significant changes, but see if there are some ways to save money on these necessary expenses. Maybe you can move to a smaller place or less expensive area to lower your rent. Maybe you can shop at a discount grocery store instead of a premium one. Don’t sacrifice too much. You still want to make sure all of your Needs are easily met and you can live comfortably from day to day. Make sure that even if you make cuts, you are prioritizing your mental and physical health. For example, please do not cut out food to save money. You need to eat to live and you need to have food to energize you to stabilize and make progress on your financial journey.
Under the Wants section, you may need to make some sacrifices. Note, that this is the only time in the 10 Steps to Building Generational Wealth, where you need to make significant sacrifices. The goal is that these sacrifices should be temporary. I don’t want you to drastically change your lifestyle, but you may need to make some short-term sacrifices in order to stabilize then get ahead. So, under your Wants category look for areas you can sacrifice for the short term. Maybe you can go out to eat less for the next few months. Maybe, you can sacrifice unnecessary travel for the next couple of months. This is where the art part of stabilizing comes in. There’s no perfect way to lower the spending on your Wants. Start by picking out a few items you can sacrifice and then see how it goes. Again, the idea is that you will be making a short term sacrifice here, so that you don’t have to make these kinds of sacrifices later in your life.
Under the Waste section, look to eliminate all of these expenses. Try to eliminate them by the next time you review your personalized cash flow statement.
Once you’ve finished this in-depth review, make sure to implement the opportunities for improvement right away. Before you move on, set a time one month later to review your personalized Cash Flow Statement again.
Continue doing this review monthly until you have a positive net cash flow for 3 months straight.
At that point, you have successfully stabilized.
Lastly
No matter where you are starting off on your journey to building generational wealth, you need to start with a personalized cash flow statement. Even if you are saddled with crippling debt, you need to have a cash flow statement so you can discover a way out.
If you already have successfully generated personal wealth, you need a cash flow statement to find out how much you can safely dedicate toward turning that personal wealth into generational wealth.
Review your personal cash flow statement regularly. If you have a significantly positive net cash flow, review your statement annually for opportunities to improve. If you have a negative or barely positive net cash flow, review your statement monthly until you can build at least a 3-month track record of a personalized cash flow statement you are satisfied with.
In conclusion, stabilizing is an art, and it might take some time to master. Even if your numbers don’t look good at first, remember that knowledge is power. Just the process of creating your personalized cash flow statement and evaluating it will help you take power back over your financial life. As long as you are taking steps toward a positive net cash flow, you are heading in the right direction.
For many, stabilization, the first step toward building generational wealth, will be the hardest one. If that’s the case for you, just know that it gets easier from here. In the words of Isaac Newton’s First Law, “An object at rest remains at rest, or if in motion, remains in motion at a constant velocity unless acted on by a net external force.” In other words, nothing will change unless you do something to make it change. The process of creating your personalized cash flow statement, analyzing it, and implementing changes can be the “external force” that causes a change in your financial trajectory.
This blog post is a rough draft for Chapter 1 of 10 for my Step-by-Step Guide for Building Generational Wealth. For now, each step will be in the form of a monthly blog post. I really hope to get your feedback and thoughts. After finishing the step-by-step guide, I plan to revisit each blog post, add detail, implement changes based off of your feedback and thoughts, and then publish the guide into a book. While creating a book is a daunting task, the impact that I think this book will have on my community continues to motivate me.