Revenue – Expenses = Margin
Margin= where financial planning happens.
Financial Planning= Helping to make life’s dreams come true
Cash flow management is the cornerstone of all financial planning. It is omnipresent in all areas of financial planning. It is the alpha and omega.
Think that you won’t need to manage cash flow once you make a lot of money? Think again, because highly compensated people file for bankruptcy every day. It arguably becomes harder; the more money you make, the more money comes in, and the more money typically goes out.
So now that we’ve established that even billionaires need to watch their expenses, and that cash flow management is the cornerstone of financial planning, shouldn’t we go ahead and get pretty good at it?
It’s critical that we don’t call this budgeting, because if we call it budgeting then we will never do it. Or maybe we do spend time creating a hypothetical budget, only to forget it a few months later. Either way, calling it budgeting is also inaccurate because budgeting only focuses in on the expense part of cash flow management. If a company was trying to increase it’s margin, don’t you think it would put just as much if not more focus on driving revenue than controlling expenses? Let’s refrain from calling it budgeting and start calling it cash flow management because the end goal is to increase the margin between revenue and expenses.
And it’s not by coincidence that the revenue comes first. Don’t get me wrong, cutting expenses is certainly important. We must focus on slashing unnecessary costs because not only is it in our control, but it may be one of the quickest ways to make an immediate impact. However, more important than cutting unnecessary expenses is knowing that you can only cut them so far. We still must live, and life is expensive!
Although there is certainly a limit to how much we can cut, there is no limit to what we can earn. That being the case, we MUST not only cut costs, but also constantly focus in on earning more!
We must earn more because if our income stays the same, inflation can occur, and the price of goods and services will go up. Remember when you were a kid and a million dollars used to be a lot of money and being a Millionaire was the end goal? Well, $1 million isn’t worth as much as it was 20 years ago, and it won’t be worth as much in 20 years as it is now.
Therefore, driving revenue and controlling expenses is so important, because saving money is necessary. Luckily saving money is easy; increase revenue and reduce expenses… See, it’s easy!
Of course, I’m kidding. Saving money is kind of like losing weight; it’s simple yet extremely difficult at the same time. For instance, if you expend more calories throughout the day than you take in, you will inevitably lose weight. Inversely, if you expend less money throughout the month than you take in, you can inevitably grow your savings.
So… how do we get this done?
Step 1: Practice Mindfulness by Tracking Your Expenses
“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.”- Will Rodgers
In general, tracking can have unbelievable results. The only problem with tracking is the actual act of tracking, as it can be a nuisance. Tracking takes structure and discipline to make it a habit. Simply tracking an activity can enhance that area of your life. Furthermore, the discipline of tracking one area of your life can often help enhance other areas as well.
For example, my friend Bob tracked every calorie he ate over the past year. Not only did he lose 50lbs, but he has a new sense of confidence that has positively affected other areas of his life. Or even more pertinent, my friend Ashley has tracked every expense over the last three years, and because of this was not only able to pay off her student loans but also bought a fantastic new condo where she is truly enjoying life.
In a world where paying with cash is archaic and we fight for dinner bills to get the credit card points, we don’t feel the pain of paying something until the bill comes at the end of the month which can desensitizes us from our spending. Because of this, we must take the time to track our expenses, as hurtful as it may be. Whether you use an app, journal, or an Excel spreadsheet; try practicing mindfulness by tracking your expenses for a month and you may notice your bank account increase and may be able to appreciate your bigger purchases even more.
Step 2: Evaluate: Are you getting out what you are putting in?
Once you have enough data from tracking, it’s time to have a real talk with yourself and scrutinize where your money goes. After we have identified where the money is going, we must ask the question, “We spent x amount of dollars on this, did I get x amount of value out of it?”
I once had a client tell me emphatically, “We spend around $5k on football tickets and tailgating each year, and we aren’t budging on it; that team is our life!” It didn’t matter that they severely needed more money in their savings, it was clear to me that if we were going to be successful in working together, we had to find another way to save money.
So, we did. We got to work, pulled the credit card and checking account statements from the last 90 days, and asked the simple question, “We are spending x amount of money on this, are we getting x amount of value out of it?”
Are we getting $6,000 of value from football tickets? Yes, we are getting $10,000 of value from them, so we will keep them.
Are we getting $100 a month of value from cable?
Are we getting $700 of value from the luxury vehicle each month?
How about $1500 a month of value from the luxury apartment?
$2,000 a month from your vacation home?
$100 a week on eating out?
Each person’s values are different and there are no right or wrong answers to any of these questions. In general, we can only truly value a few things in life and we certainly value some things more than others. It’s about identifying what brings us the most joy and making certain we allocate our valuable and scarce resources towards those activities.
Step 3: Cut the FAT
Just like in losing weight, we must cut out the unnecessary and replace these items with something more feasible. Maybe eating out on a Friday night isn’t worth $100, but firing up the grill, opening a bottle of wine, and hanging at home with the family and furry animals is worth well more than the $30 spent. Maybe the cable isn’t worth the $100, but cheaper streaming options get the job done. And maybe, just maybe, you can catch a few football games at home on the television this year; but hey, isn’t that up to you to decide?
Step 4: Ask yourself for a raise
We tend to get paid what we think we are worth, and unfortunately, we are good at undervaluing ourselves. This manifests itself in poor negotiating skills, suppressed ambition, and career stagnation.
This results in suppressed incomes as too many people play small and never live up to their potential. Of course, there are many more factors culminating in your revenue, but I do encourage you to take some time to meditate on your next move.
That next move might be asking for a raise or being persistent about that promotion you’ve been craving. Maybe it’s switching companies, or even starting your own. Whatever it is, it’s your move and you are up.
Your financial plan is simply a strategy to accomplish your life goals. This strategy is funded by the margin between your revenue and expenses, and the larger margin we have, the quicker we may be able to reach our goals and the bigger our dreams can grow.
To increase your margin, practice good cash flow management by tracking your expenses, cutting the fat, and always staying focused on increasing revenue. Happy planning!
William Franks is a registered representative of and offers securities and investment advisory services through MML Investors Services, LLC. Member SIPC. (www.sipc.org) The Mill Financial Partners is not a subsidiary or affiliate of MML Investors Services, LLC, or its affiliated companies. 1050 Crown Pointe Pkwy, Suite 1800, Atlanta, GA 30338. 770-551-3400.
The views and opinions expressed are those of William Franks. Williams Franks views are not necessarily those of MML Investors Services, LLC or it’s subsidiaries.