Which is More Essential in Personal Finance- Cash VS Cash Flow

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Both cash and cash flow are important aspects of personal finance, but they serve different purposes and have different implications.

Cash refers to the physical currency or funds held in bank accounts, including savings, fixed deposits or investment accounts.  It represents the actual amount of money (usually a lump sum) you have available at a given time.  Cash is essential for meeting immediate financial obligations, such as paying bills, making purchases, or handling emergencies.  Therefore, having an adequate cash reserve is crucial for maintaining financial stability and flexibility.

Cash flow, on the other hand, refers to the movement of money in and out of your personal finances over a period of time.  It considers your income (from active work, dividends, rental etc), expenses and measures the net change in your financial position.  Positive cash flow occurs when your total income exceeds your expenses, allowing you to save, invest, and build wealth gradually.  On the flip side, negative cash flow happens when your expenses exceed your income, potentially leading to debt and financial stress.

Proponents of cash flow believe that cash flow often holds greater significance in personal finance because it provides a more comprehensive view of one's financial health.  Positive cash flow enables individuals to cover their expenses, save for the future, invest, and achieve long term financial goals.  It allows one to have a surplus of cash to manage small amounts of unexpected expenses or take advantage of opportunities in markets through dollar cost averaging. By monitoring and managing one's cash flow effectively, individuals can make informed decisions about spending, saving and investing, which ultimately impacts their long-term financial well-being.

Conversely, supporters of cash will argue that having a healthy cash flow doesn't mean one can neglect the importance of cash reserves.  This is because a solid emergency fund and readily available cash are crucial for handling large amount of unexpected expenses, dealing with income fluctuations, or taking advantage of time-sensitive opportunities through lump sum investments during market distress. Cash reserves provide a safety net and financial security during challenging times.

Personally, I think that both cash and cash flow are equally important in personal finance, but probably, cash flow has an edge over cash.  

Cash can be used to invest in income-generating assets to improve cash flow, but that takes time.  Before the assets are able to generate positive cash flow, finances may be tight for individuals due to the lack of cash flow and short term depletion of lump sum of funds.  The situation is made worse if individuals are having negative cash flow, because that will mean that in time to come, the cash will be fully depleted and financial instability arises.  

Similarly, cash flow can also be gradually saved up to build up cash reserves, and that takes time as well.  However the difference between the two is, before the lump sum cash reserves are sufficiently built up, the positive cash flow can be used to pay off large expenses in the form of instalments or interest payments, which will enable individuals to tide through the tough times.  

Nonetheless, the best case scenario will be one where both cash and cash flow are healthy, or even abundant, like the case with famous Singapore blogger AK71!  Being a huge distance away from satisfactory levels, I shall continue to build up my cash and improve my cash flow.  Barista FIRE, here I come...!

Comments

  1. mysecretinvestment22 June 2023 at 16:26

    Hi there,

    You are one of the rare bloggers that touched on the topic of cash flow. For those working, their main cash flow would be from their salaries. So their focus would be on building up their wealth.

    For retirees and those close to retirement like myself, our focus should be more on cash flow. Cash flow is what oils our lifestyle. If they dont secure their cash flow, they are likely to end up asset rich but cash (& cash flow) poor. The worst case would be to end up asset poor and cash poor.

    It is thus important to start thinking about building up income streams other than from work income. In S'pore we can take advantage of the national savings schemes available, namely the CPF and the SRS. When built up well, these two schemes can provide three passive income streams. Let me elaborate:

    Our CPF OA & SA will earn interests yearly that we can withdraw. As a couple, my wife and I can withdraw $68K a year of interest combined from our OA & SA.

    The next cash flow source is the CPF Life which we planned to start the payout at 70 to give us a combined $72K a year.

    The SRS savings will be another source that we drawdown from. This source would provide us $43K yearly over 10 years.

    In order of sequence, I would say build up the easy (& safer) ones first like the CPF and your SRS. Then you can start playing with stocks & shares and investment into properties.

    Last year, our stocks gave us a dividend income of $88K and our rental property brought in $39K in rentals. But these two income sources are not stable nor reliable.

    You would want to define your (retirement) lifestyle based on the more stable & reliable income sources namely the CPF and SRS.

    ReplyDelete
  2. BFIRE24 June 2023 at 07:22

    Hi mysecretinvestment, thanks for sharing. I am envying the cashflow you are currently enjoying. I hope I can reach there one day, but I suppose I got the order mixed up, and wasted quite some years. However, better late than never. Now just trying to buff up my CPF while holding on and reinvesting my dividends into the portfolio.

    ReplyDelete

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