Tuesday, December 1, 2009

Cash Flow vs Asset, which is more Important ... ?

Cash flow is money in your hand where you can USE right now to buy food and petrol. Asset is something that is worth some value but may not be CONSUMED directly like a house and car.
Although there may be more complication like cash is part of asset and the correct wordings for this topic is liquidated vs non-liquidated assets etc. But if we simplify personal finance as much as possible, cash is cash and asset indicate non liquidated net asset.
Many people who are good with their personal finance numbers always asked which is more important ? Maintain a positive Cash Flow or increase net Asset ? Well, the simple and direct answer is:

Cash Flow is more Urgent and
Asset is more Important

Enough cash flow is important for you to live on. At the moment cash ran out, you may start to suffer so much that your personal emotion may kick in affecting all your other judgement; Including selling your asset way under its value. So what if you have a billion dollar castle in a desert while all you need is a drip of water ? So cash flow not only allows you to get by but it can totally destroy you. When cash flow approaches negative arena, its an Urgent warning !

A properly setup asset will automatically increase your worth in time and it is the key to passive income in personal finance. So the long term goal is to have enough asset setup so that you can live happily ever after. Without any asset, you will always HAVE TO earn what you need. Active income means you HAVE TO always work despite if you like it or not. You will have less choice. So setting up good assets are Important in long run.

Following the Urgent vs Important concepts, the standard way of improving the situation is:
  1. Make sure you solve all the urgent matters,
  2. then allocate time to do more important stuff,
  3. and make sure all the important stuff are done to eliminate chances of any urgent matters in future.
Like wise ...
  1. Make sure you have enough cash to get by then => $C
  2. Acquire as many good asset as possible and lastly => ( $A x i% )
  3. Target to have enough asset's return to cover all your cash flow needs
( $A x i% ) > $C

Needless to say, most people are rat racing in step 1 for a long long time. Then once they moved on to step 2, they felt relief and may relax too much that they forgot to keep a healthy level of cash flow. Not knowingly that cash flow can come back anytime to destroy all the stuff you have setup in step 2. This is especially obvious for people who turn from a career to a business during their mid age life.

Before reaching step 3, you will have to juggle both your cash flow and asset ....