Personal cash flow is one way to measure financial health. It is the most important element in wealth management.

Cash flow consists of income and expenses. It is about how much inflow is generated (income) and how much outflow (expenses) takes place. It is usually measured on a monthly or yearly basis.

• Surplus or positive cash flow is when income is more than expenses: The surplus can be saved for an emergency fund or to invest.
• Deficit or negative cash flow is when expenses are more than income: This means the individual is likely to fall into debt.

The 2019 Malaysian Financial Literacy Survey by financial comparison portal, RinggitPlus, showed that 43% of Malaysians spend more than or exactly what they earn.

Some 53% of the 8,000 surveyed did not have enough savings to support themselves for more than three months.

Here are some tips to improve cash flow and create a surplus.

1. Understand your current income streams

For those who are employed and receiving a fixed wage every month, it is easy to work out.

Keep track of payday and pay off all financial commitments immediately. Keep track of the mandatory deductions such as Employees Provident Fund, Socso and income tax.

For those who are self-employed, your income is likely to vary each month. It is important to understand the inflow pattern to meet financial commitments on time.

In addition, business owners must not mix business income with personal income. They should pay themselves a monthly wage and work out how much to pay out in yearly dividends without disrupting the business cycle.

Whether employed or self-employed, investors could also enjoy passive income from their investments.

2. Keep track of expenses

People need to understand how much they spend on frequent and less frequent expenses.

Frequent expenses would be groceries, fuel, loan repayments and car servicing. Less frequent expenses include annual quit rent on a property, renewal of road tax and insurance premium payments.

Having an emergency fund is important for unexpected expenses such as medical bills.

Expenses can be tracked with paper and pen, on a computer with a spreadsheet or with one of many expense trackers available as mobile phone apps.

Make sure the tracking tallies with the bank account to have a reliable record.

3. Identify the types of outflow

Once the expenses have been tracked, categorise the outflow. For example:

• Savings outflow: This includes mandatory or voluntary savings and premiums for insurance or takaful plans.
• Financial commitment outflow: Payment of loans or commitments to financial institutions.
• Expenses outflow: Home and living expenses, transport, education, entertainment, subscriptions and so on.

This helps in visualising where the money is going and with setting priorities. If the entire outflow is on items deemed necessary and it is higher than the inflow, a debt management review is advisable.

4. Eliminate unimportant expenses

After tracking expenses and categorising outflow, a pattern should emerge. Use these data points to reflect on spending choices.

Re-evaluate the true needs and wants by asking these questions:

• Is it really necessary to spend on these items? What is the return on investment?
• Are there suitable, cheaper alternatives?
• Can one afford to continue with this spending pattern? Would it be better to use the money for savings and investments?

This is easier said than done. Everyone wants a nice lifestyle and for some shopping is a hobby. People must take charge of their lives and their spending choices.

5. Increase the income

If the cash flow is in deficit, in addition to trimming outflow, increasing the income, either passively or actively, is an option.

Passive income would be dividends received from investments or rental income. This method is more suitable for the long term, a retirement fund, for example. Learn about investment options that match one’s risk profile.

A salary is an example of active income. Consider asking for a raise or take on side gigs to generate active income.

Perhaps an additional certification or licence might bring in more money. But always remember to track the side income.

6. Sit down and plan expected cash flow

Having a plan helps in making better and faster decisions. Here are some tips to make a good one:

• Set a budget: This will keep spending on track, but be realistic.
• Plan meals: Planning meals in advance means one knows what can be bought in bulk (money savings) and which to buy less of (less wastage). An additional benefit is that the quality of the food intake is generally better.
• Sign up for loyalty programmes: Take advantage of the discounts and special offers on groceries, household supplies or even petrol.
• Plan shopping trips: Apart from saving time, it can reduce travel expenses.
• Plan payments for loans statutory obligations: This helps in setting aside the required sum. Timely payments avoid additional interest or penalties as well.

Continue tracking expenses and review the numbers regularly. How does the plan match up with actual spending? What needs to change?

7. Working with an expert

Everyone has financial goals – to be debt-free, have a comfortable retirement or to provide a good life for the family.

A licensed financial planner can give a better understanding of how to reach these goals, which financial decisions to prioritise and how far away the goal is.

They can also guide and motivate one. Even if one takes a wrong turn, they will be there to show the way back.

Conclusion

The key to financial freedom starts with a healthy cash flow. Managing the cash flow well will put that hard-earned cash to work for a better future.

This article first appeared in MyPF Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.