Creating Cash Flow Stability
Ian Bloom, CFP® discusses how to move from the Survival Tier of the Hierarchy of Cash Flow to the Stability Tier. This level up involves the creation of an emergency fund that can insulate the household from unexpected expenses. Creating cash flow stability is very necessary before moving on to the exciting ways to spend money.
What's up internet? My name's Ian Bloom. Welcome to Nerd Finance. I'm your resident financial life planner and huge nerd. In today's episode, we are going to be continuing to focus on this graphic, the Hierarchy of Cash Flows that I've been using to help my clients understand where they are in their cashflow journey. This is our second stage, stability. Stability is interesting because it comes after you've started to get a handle on things, whether it's in real life or in a game. See, stability is developed when you understand the mechanics of what you're trying to do and have somewhat of a basic rhythm to them. In a game it may come when you have your go-to combo of your sword and then your spell to take out the bad guys. Well, in real life, stability as a cashflow thing comes about when you have a consistent amount of income that is exceeding your expenses and have started to allocate the money properly.
What I mean by this is if you have $2,000 a month coming in and $1,500 you must spend on bills and needs like groceries, and you have $500 leftover, stability starts to develop. But instead of just spending that $500 on things like Xboxes, Nintendo Switches, and awesome games, or maybe the furniture that you want in your apartment, you actually start to allocate this money towards savings. You see, savings in an emergency fund is where stability actually comes from. Knowing that you have three to six months worth of expenses there to absorb all of the changes that will occur in your life. Life is bound to change, the rules of the game change every day. Your tire may pop or your hot water heater may break, and you may need to spend some money to replace those things. Well, it's going to be a lot easier to come up with the money if you already have it in savings. And it will disrupt your day-to-day life a lot less if you have built up these savings and can therefore absorb those impacts.
For instance, that $1,000 car repair sucks a lot more if you have $500 a month and you have to put it on your credit card and pay it off over two months, then if you already have $5,000 in savings and so you just pull a $1,000 out of that. Now, $5,000 in savings doesn't happen overnight, which is why stability is a stage and not just a step. See, you have to save the money over time. Let's go back to that earlier example. We have $2,000 in income coming into the household every month, we have to spend $1,500 of that on bills like groceries and things, and so we have $500 leftover. You may decide to allocate $250 a month to your savings to start building it up. And then you may spend the other $250 on the extras and things that you're having fun with. That is how you develop stability. It doesn't happen immediately, it happens by those repeated actions towards saving over time.
I hope that this video has been helpful to you. Stability is the stage that you want to reach to get rid of that financial stress that's been plaguing you for a while. It helps make the day to day less stressful. It helps you avoid that paycheck to paycheck dance. As we move through the rest of the series, we'll start focusing on the more aspirational things, the future stuff. Anyway, have a wonderful day. I hope the video was enjoyable.