Do you live in broke land nearly every month?
Being broke is a terrible thing. A really bad place to be. It’s like you're in a valley but can never seem to come out of it.
Here's a quote I heard once that I think will help:
Valleys Mature Us whilst Mountains Inspire Us.
Whilst you mature and grow in the valley, the important thing is to stay positive and do things that move you onwards and upwards.
More on that later.
There are many reasons why many people are broke. Some of these include:
- Pure laziness
- Bad habits
- Hanging around with losers
- Watching TV daily
- “Living the life”. The fake one that is.
Being broke also has many consequences:
- Anxiety and depression
- You can't pursue your dreams
- Have to say No to every opportunity
- Can't help anyone
- Borrowing all the time
- Feeling of shame
- Never achieving Financial Independence
There is one reason that trumps pretty much all reasons for why people are broke.
This one reason why most people are broke is also the same reason most are rich.
Have you guessed it yet?
It's the one thing that is the lifeblood of every business out there and also happens to be the most liquid of all assets.
It is the reason people making six-figure incomes live hand to mouth monthly, without a clue in the world how to diagnose the problem.
It’s why superstar footballers make millions in their twenties and then become broke afterward.
This is also one of the top reasons why most startups fail!
That reason is the inability to manage Cash Flow.
[yellowbar]The measure of your financial intelligence (IQ) is your ability to control Cash Flow. It is the one thing you must master to stop being broke.[/yellowbar]
The larger your ability to control cash flow, the bigger the problems you can solve.
Why do you think the likes of Bill Gates can get out there and have huge world impact? Yes, he has a huge heart for humanity etc.
And you do need to have a heart for impact. However, he also understands cash flow very well.
Before we dive in, it's important to understand what cash flow actually means.
What is Cash Flow?
Cash Flow is the movement (flow) of money through your life.
The key thing to note here is that the flow of money has a source and a destination, and the direction of flow matters.
You're the control tower that plays an incredibly important role.
I liken being broke to allowing a plane crash to happen whilst you're in charge of the control tower.
It should NEVER happen.
The other important point to note here is that You are totally in charge.
You're the steward charged with making sure that the flow of money in and out of your life achieves goals that move you and your family forward whilst staying afloat!
This stewardship can be seen in business. For example, I serve as a CFO in a business, and one of my responsibilities is to make sure we don't go broke!
Letting that happen has huge consequences for staff and their livelihoods, as well as reputational damage to say the least.
In the same way, living and staying broke in your personal life has major consequences not just for you but for others because your life isn't lived in a vacuum.
Where does Cash Flow Come From & Go To?
For employees, cash flow comes from their day jobs and salaries.
And for business or side hustle owners, it comes from their profits.
For Investors, it comes from their investments in cash flow generating assets.
What’s interesting about these various sources is that they are taxed very differently, with the tax rules favouring those that take risks – The hustlers and investors.
Let’s look at this slightly differently:
For a poor person, income comes in, pays for expenses and cash flows out. The end!
The average middle-class person does exactly the same as above, except the type of expense usually includes a mortgage and some credit cards.
The reality is that when cash comes into your life, it makes a temporary pitstop in your balance sheet (on the left-hand side).
Assets (things that add cash to your pocket) live on the left-hand side of the balance sheet.
Liabilities (things that take cash away from your pocket) live on the right-hand side.
The point at which that cash lands on the balance sheet and prepares to depart is the very moment most people lose it.
[redbar]The financially intelligent person at this very point understands that money should only go to where it is being looked after (i.e. earning a return). She will pay herself first, with the primary goal of investing her money in cash flow generating assets.[/redbar]
To be able to make such investments, you must first be able to pay yourself first. And to be able to pay yourself first, you must be confident that you’re living within your means.
If you are earning income today and swapping that income for expenses in order to support your lifestyle, then you’ll remain broke.
However, if you somehow realise that your income can be retained as cash in order to invest in other cash flow generating assets, then you’re onto a winner.
In this scenario, you’ll quickly move away from the lifetime trap of earning a salary (swapping time for money) and get to the oasis of money working for you.
By doing this, you’re giving yourself a grand promotion because it takes quite a different mindset to understand that money should be working for you.
How To Stop Being Broke Forever
Borrowing from my experience in business, below are ways that successful businesses manage this consistently. These are easily applicable to our personal lives:
1. Manage Your Lifestyle And Focus On Essentials
Businesses that are run well only pay for expenses that are essential.
The only other outlays would be investments, which would be capitalised and depreciated over a period of time (great for tax!).
In your personal life, being honest about your lifestyle is extremely important.
I have written about the need to focus on independence and not status.
You cannot live for today only and expect to thrive tomorrow. One thing you can guarantee is that there will be seasons ahead.
As such your lifestyle has to reflect your acknowledgement of difficult seasons ahead. Spend only on the essentials and keep the rest.
If you make say, £3,000 a month, your expenses should never exceed £3,000. Better still, they should never exceed £2,700 (90%).
Reducing those expenses is where the magic happens. This is because the lower your expense rate, the higher your savings rate and the closer your retirement age!
I cannot stress enough how important it is to make sure that your expenses are reducing each month rather than increasing. Aim for a 1% reduction each month!
It is the only way you can begin to see the wood for the trees and actually plot your escape.
2. Create Opportunity For Cash Flow
Businesses create cash flow from 3 primary sources:
- Operating activities
- Investing activities
- Financing activities
Operating activities refers to the ability of a business to create offers that sell and generate profits, which manifests as cash.
The more a business can generate sales, whilst also converting debtors to cash, the higher will be its cash flow.
Applying this to your personal life is pretty easy.
If you only earn a salary and have seriously stripped down your expenses to the essentials, then you have no option but to create more cash flow yourself.
I am a big fan of exploring our inherent creativities and creating side hustles, which lead to cash flow generating assets. It is my chosen path to Financial Independence.
If you’re interested, feel free to join the course below:
FREE How to Launch A Profitable Side Hustle Course
Alternatively, check out:
3. Manage Your Creditors Or Debtors
Debtors and creditors are people who owe you and whom you owe respectively.
Successful cash flow management involves converting your debtors to cash and delaying your creditors without getting into trouble.
Practically, managing your creditors will be the key issue, although as you start to acquire cash flow generating assets, debtors will become a concern.
If you’re currently in debt for example and struggling to pay, a good starting point is to establish a dialogue with your creditor.
Working out your Debt Reality Check Ratio is another way of establishing whether you need formal help or not.
4. Put Controls In Place
Budgeting is by far one of the most effective controls you could ever have in place.
Controls are measures that stop you from doing things you don’t want to do e.g. Buying stuff.
A budget is powerful because it not only helps lead you to where you want to get to, but it helps you live within your means if done effectively.
The other things a budget forces you to do are:
- You finally start setting proper financial goals in your life. Goals that will liberate you from the bondage of debt and perpetual spend, and lead you to freedom.
- As a result of setting such goals, a budget will force you to track the heck out of all expenses. Gone will be your days of just drifting along!
5. Avoid (People) Liabilities
It’s sad to say this but there are people you should definitely avoid in your life.
You'll know these people by their fruit. They produce nothing but ask for stuff all the time.
These are the ones who only ever talk about their problems and never contribute to your life.
They forever hop around looking for the next person to borrow something from and never accept they have a problem.
Other types of liabilities include crooked business partners, marrying the wrong partner and having a divorce etc.
6. Be Honest With Yourself & Ask For Help
I write this very point delicately because there are people out there struggling even on six-figure incomes.
Alot of them can’t acknowledge they have a problem that’s possibly spiralled out of control or that they’re living an unsustainable lifestyle.
[yellowbar]Being honest with yourself is an incredibly important aspect of self-awareness, which is a must-have ingredient for financial independence and freedom.[/yellowbar]
Asking for help is not a bad thing. It’s a sign that you have gained maturity in the valley and want to redesign your life.
You’d be amazed how many people out there are willing to meet for a coffee and help design the life you want.
The journey to not being broke will not happen overnight. You’ll need to invest in learning whilst embracing the process of change.
Remember: We are humans and we all seek connections. Why not get out there and establish a different type of connection on this very subject of money? Start with your very close friends and family or seek a private coach or mentor.
Now that you know that controlling the direction of your cash flow is the antidote for being broke, get out there and make it happen!
What is your biggest challenge to stopping the reality of being broke every single month?
Do please share this post if you found it useful, and remember, in all things be thankful and Seek Joy.