Is cash or cash flow more important in personal finance?
Same same but different
Cash and cash flow might sound like one and the same in personal finance, but they mean vastly different things.
Cash is money held in bank accounts, fixed deposits, or investment accounts.
It’s a precise sum of money (typically a lump sum), that you have on hand at any point of time.
Having cash helps to pay off daily expenses, emergencies, and making purchases.
Cash flow is a little different.
It involves the movement of money in and out of our accounts.
As long as you have more money coming in than going out, you’re good to go.
Why is this distinction important?
The typical retirement plan goes like this:
How much money do I have?
How many years (estimated) do I have left to live?
With the amount of money I have, how much can I afford to spend per year?
If you’re solely relying on the money you have saved up (without investing or having some side income from elsewhere) this is particularly scary.
Because of the very fact that none of us has any idea how long we’re gonna live.
Estimating how much we can afford to spend each year then becomes a problem.
It’s why people are looking to learn investing and create multiple income streams for themselves.
Conclusion
It’s why I believe that cash flow trumps cash anyday.
Give a lump sum of cash to someone who doesn’t know how to manage their money, and it’ll be squandered.
Look at all those highly paid multi-millionaire footballers who went bankrupt. It’s poor cash flow management proved to be their downfall.
Having massive wealth is no guarantee that you won’t suffer a financial disaster.
Knowing how to generate cash flow is far more important.
Cash can save you in the short-term, but it’s cash flow that sustains you financially in the long run.
It goes back to the concept of financial confidence.
If you were to start from zero today, would you be able to generate income and cash flow?