Over the past few weeks I’ve been tinkering with my annual rolling budget almost every day. Not because I am compulsively addicted to my budgets, in fact, even as a Chief Financial Officer-turned-Chief Transformation-Officer, I rarely consult my budget, and content myself with a quick glance every month to understand what the big misses were and where we have opportunities. Rather the situation is the result of compulsively investing and now finding myself, with Mrs Chief Money Man, in a situation where we are CASH FLOW POOR even though we are ASSET RICH. Dealing with ASSET RICH and CASH FLOW POOR is much like a game of chess, with one exception. You need to understand precisely the situation you are in, where the assets you can use are, what you can sacrifice to win, with the exception being that it usually takes a lot longer than a standard game of chess.
My recent CASH FLOW POOR situation stems from 18 months ago.
I’ve always been a big investor. Long term investing in several asset classes is how most of my wealth has been created. I say most, as I was able to negotiate a fairly large severance when I moved from my last job and that created a significant part of my wealth. Following that successful negotiation, I had a liquidity windfall. The money was equivalent to several years, if not over a decade, of monthly savings and obviously, being who I am, I had a plan to use it.
The plan entailed a number of separate investments and use of funds. I used it as follows:
- 5% went into paying off all the short term debt I had accumulated
- 10% went into paying down a chunk of long term asset debt
- 10% went into seed capital investments in a FinTech and a restaurant
- 30% went in a medium term, tax advantaged, stock picking portfolio/vehicle I wanted to create
- 45% went in a long term stock and bond investments
It felt great to liberate myself from the short term debt which had accumulated for several unimportant reasons.
Paying the long term debt off was purely a way to bring down monthly payments as the debt is at a fairly low interest rate, almost equivalent to the ECB’s target inflation rate, so I have little incentive to pay it off quickly.
The seed capital investments were a way for me to diversify even further.
The FinTech could be considered a high risk, high return bet, whereas the restaurant was a way to diversify my portfolio even further ((link)) and also secure a very generous annual stream of dividends. Based on the business plan, which 18 -months on has been very much met, my investment should be returned to me by way of dividends in 24 months.
The tax advantaged vehicle is a regulated fund that requires me to keep my funds in the vehicle for 8 years and then exonerates me from any capital gains tax.
All in all, I’ve met my expectations in terms of returns and my monthly pay-check and annual bonus should have been comfortable enough for me not to worry too much about cash flow for the foreseeable future.
The Turning-Everything-on-its-Head Point
My comfortable plan was turned on its head about 6 months after all the above investments. That was when we finalized plans for a beach house, on a little island off the European Atlantic coastline. This is my first life-style investment. Though, truth be told, the location is incredibly popular and longer term I think we’re going to make a killing.
To anyone who has been through home renovations, you’ll know what I’m referring to, when the initial budgets suddenly sky-rocket up 3 times. On the upside, during the house purchase negotiations, we managed to negotiate the price down 30% after we discovered a few flaws in the legal documentation, however it wasn’t enough to offset the architectural design price creep.
In addition to price creep, setting up a house, which is due to be finalized this summer, is not a cheap undertaking. Bedrooms require beds. Beds require mattresses. They also require pillows and bed sheets and blankets. Rooms require cupboards and cupboards are there to be filled with all sorts of delightful house things.
Living rooms require couches and armchairs and dining rooms need chairs and a table. And the list goes on and on.
How to deal with evaporating cash when all your assets are tied up.
1. Follow a strict budget
As I started to notice that my future projections were focusing in on a possible cash crunch, I started a parallel budgeting process that focused purely on the outstanding cash balances that I had and rolled that forward 18 months.
My usual budget process is a monthly Cash-in and Cash out statement. It tracks all our expenses and our income for any given month. However, it is not the best tool to give a bird’s eye view on rolling cash balances.
Knowing at a glance your projected cash balances can be crucial, so I augmented my monthly tracker with a balance forecast, which allowed me the ability to closely monitor and adjust my cash balances.
Then I dialed back into monthly budgeting.
Knowing and tracking what you spend is essential to coming to terms with living within your means. While Mrs Chief Money Man and myself generally live within our means we do occasionally spend money are things we don’t really need. Or experiences that we could live without. This means our monthly budgets can sometimes get surpassed by sporadic excess spending.
I needed to eliminate this, as much as possible. (Mrs Chief Money Man doesn’t like me telling her how she should spend her money.)
2. Search for alternative cash sources
When projected cash balances start getting low another option to apply after getting back strict control of monthly expenditure, is looking for alternate cash sources. Commonly termed side hustles, this can be a great way to augment your revenue streams.
My choices were fairly simple: I’ve been constantly getting requests for interviews on the various industries I have worked in for consulting firms. They usually offer a few hundred dollars for a 30-45 minute Q&A. In the past I’ve ignored them, but why not try one I thought.
The process was fairly simple, with the interviewer asking me a list of ever detailed questions on my current and past industries. It never got to giving precise information on my current company, which was good, as that was a line I would not cross. 45 minutes later a PayPal notification informed me that the agreed sum of money had been deposited into my account.
The second choice was about doing things myself. My house renovation is in a location that is a few hours travel from my home and so I’ve got people doing every part of the renovation. However certain things I can do myself, having already renovated or part renovated several properties. I’m a fair bit slower than professionals but my time means money saved. So I picked a part of the work and stood down one of the contracting companies.
Side Hustles are truly everywhere, you just need to go looking for them.
3. Set up bridging mechanisms to secure piece of mind
The third option I took was to go speak to my banker. She is a pleasant lady, always looking to sell me something and she never gets frustrated when I refuse, so imagine her delight when I came looking to set up an overdraft!
I’ve avoided overdrafts like the plague for many years after learning some hard life lessons many years ago, but now looking at my future cash balances and knowing that number 4 below would take a few months, I knew I needed to bridge a gap that had formed.
After a 15 minute conversation, my banker had confirmed that a temporary facility had been put in place which meant I could breathe a little better and not have to worry about a check being bounced or a transfer refused.
Piece of mind is precious and having your mind clear to focus on solutions rather than problems can be a big game-changer.
4. Liquidate short term assets that are either under-performing or which have over-performed
My fourth option involved a detailed scrub of my investment portfolio. I had two objectives, 1/ find under-performing assets that I thought would still recover and that’s why I was still holding them and 2/find assets that had run up fairly high and where I could harvest some of the profit.
My thinking was that for the assets I thought would recover, I probably still had the time, when my cash balances turned more positive to re-invest and cycling out, meant I could take some of the tax upside to offset the profits on the over-performing assets.
I wasn’t able to match loss for profit on a near perfect basis, but I got to a place I’m comfortable with and my cash balances have taken a nice bump upwards.
Doing this reminded me of one reason why I started investing in the first place: to make sure I had money aside if ever I needed it!
Morale of the story
CASH FLOW POOR can obviously happen at any time and not just when you’re ASSET RICH.
Having a budget that goes out 12 months or even better 18-24 months is critical to avoid CASH FLOW POOR situations.
Putting money aside today, so that you can use it when you need it tomorrow, is the simple rule that underpins not just wealth creation but also sensible financial planning to avoid a short term cash crisis.
Want some more tips and articles on building wealth and running budgets. I came across a great site called Finimize the other day and exchanged with Henry on their team. They provide a daily digest of great, simple information. They’ve created a special sign-up link for the Chief Money Man community, and you can hop to their site using the link here below.