The Household CEO: Protecting Your Cashflow

By Staff

Ever known anyone who was great at business, but stunk at personal finance? I’ve often wondered why more people don’t operate their household finances in the same manner they operate their business.

Of course, the reverse of that is true as well. I have known quite a few business people much more willing to spend company money than their own. In my opinion, that is just as bad, because someone has entrusted you with those earnings (shareholders, business owners, etc.) and it is your responsibility to be a good steward of it.

I digress.

Over the years, I’ve tried to implement this approach in the Frugal household. One of the things I’ve been most adamant about is protecting our cashflow. That is, I try to avoid entering into arrangements that could offset our future income. I take this approach for a variety of reasons.

1. Future income is not guaranteed. Just like in business, especially a seasonal business, there is no guarantee of future cash flow. Contracts can be canceled. The local economy can tank. Customers’ appetite could change for your product.

2. Increased monthly obligations rob money to set aside for growth. Just like a business likes to reinvest a portion of their profits to grow, I like to “reinvest” a portion of our income into income-producing assets: dividend stocks, and eventually rental real estate.

3. The higher my monthly obligations, the more I have to work. By paying off our mortgage early, refusing to add new debts, and living frugally, we are hopeful that we can retire earlier than most people because we won’t need as much investment income to cover our basic living expenses.

Skip Toys and Luxuries, Unless You Can Pay for Them

Ever hear the saying, “He who dies with the most toys wins.” Maybe so; unless he also dies with a lot of debt for those toys.

I don’t begrudge anyone for wanting to collect a few toys along the way, but I do think it’s best to acquire them with cash, rather than obligating a portion of your paycheck over the next 60 months to pay for them.

This means you may have to:

  • Drive an older car until you can pay cash for a newer one.
  • Not trade up in house, but stay put and pay off the one you’re in.
  • Buy modest gifts for friends and family for Christmas, rather than maxing out your credit card and struggling to pay it off before the next Thanksgiving shopping season.
  • Take one or two reasonably priced vacations each year rather than a lavish get-away every other weekend financed by American Express.

Again, nice vacations, cars and houses are not necessarily bad things. It is the debt attached to them that steals from your future paychecks.

Some will say that debt is a tool to acquire these things, and in some cases their values do go up (then again, maybe not, as we’ve experienced with housing lately). However, for us the debt represents added risk, and we are all about reducing the amount of risk exposure in our lives.

Bottom line…I’d rather own my stuff than it own me.