Money is something we use every day, yet many people go through life without ever developing a clear understanding of how it actually flows through their household.
Income comes in, expenses go out, bills are paid and, hopefully, something is left over. But understanding money is about much more than simply earning enough to cover your expenses. It is about knowing where your money goes, creating surplus cashflow and then making informed decisions about what to do with that surplus.
For many people, this is where the journey from earning money to investing begins.
Cashflow comes first
Before thinking about shares, property, managed investments or superannuation strategies, it is important to understand your cashflow.
Cashflow is simply the movement of money coming into and going out of your household. Your income may include wages, business income, investment income or other regular payments. Against this are expenses such as housing, groceries, utilities, transport, insurance, loan repayments and lifestyle spending.
When income consistently exceeds expenditure, you create positive cashflow.
That surplus can become incredibly powerful.
The challenge is that many households have reasonable incomes but little idea where the money disappears each month. Small subscriptions, frequent purchases, increasing insurance premiums, interest costs and lifestyle expenses can gradually absorb what might otherwise become savings or investments.
Understanding your numbers provides clarity.
Saving creates financial breathing room
Once you understand your cashflow, the next step is usually creating a financial buffer.
Having accessible savings can help manage unexpected expenses without immediately turning to credit cards or personal loans. Car repairs, medical expenses, household maintenance and changes in employment can all place pressure on household finances.
A cash reserve provides flexibility.
However, once an appropriate cash reserve has been established, accumulating increasingly large amounts of money in a bank account may not necessarily support longer-term financial objectives.
That is when the conversation may begin to shift from saving to investing.
When saving becomes investing
Saving and investing serve different purposes.
Savings are generally designed to provide security and accessibility. Investing typically involves accepting some degree of risk in pursuit of longer-term growth or income.
Investment options may include shares, exchange traded funds, managed funds, property, superannuation or other assets.
Importantly, the right investment strategy will be different for everyone.
Someone investing for a goal three years away may require a very different approach from someone building wealth for retirement in 20 years. Your income, debts, tax position, tolerance for market movements, family circumstances and financial objectives can all influence what may be appropriate.
Cashflow can become your investment engine
One of the most powerful aspects of understanding cashflow is discovering how relatively small amounts of regular surplus income can become part of a long-term investment strategy.
Rather than waiting for a large lump sum, some investors gradually contribute money over many years.
Regular investing may also encourage financial discipline. Instead of asking, “What is left at the end of the month?”, the focus can become deciding in advance how income will be allocated between living expenses, savings, debt reduction and future investments.
Over time, investment earnings may themselves generate further earnings, creating the potential benefits of compounding.
But investing also involves risk. Markets can fall, investments can lose value and past performance does not guarantee future returns.
Advice is crucial
Understanding your cashflow is an excellent starting point, but financial decisions rarely exist in isolation.
Should surplus money go towards the mortgage or investments? How much should remain in cash? Should additional money be contributed to superannuation? What level of investment risk is appropriate? What are the tax implications? How should investments fit alongside insurance, retirement planning and other financial goals?
These are important questions.
A qualified Financial Adviser can help you understand your financial position, identify your objectives and develop a strategy that considers the bigger picture rather than simply selecting an investment.
Ultimately, investing does not begin with finding the next great opportunity.
It begins with understanding your money.
Know what comes in. Know what goes out. Build financial resilience. Create surplus cashflow. Then seek professional advice about how that surplus may be used to help build the future you want.
Because good financial outcomes are rarely about one investment decision.
They are usually the result of many informed decisions made consistently over time.
If this article has inspired you to think about your unique situation and, more importantly, what you and your family are going through right now, please get in touch with your advice professional.
This information does not consider any person’s objectives, financial situation, or needs. Before making a decision, you should consider whether it is appropriate in light of your particular objectives, financial situation, or needs.
(Feedsy Exclusive)