My Ideal Cash Flow

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Being inspired by the simplicity of the cash flow diagrams from this blog (a blog that talks about early retirement which I followed for quite a while now), I am tempted to create a version for myself.
Clear diagram actually can speak for itself. So can a simple cash flow diagram to convey a strong message. It helps you to see the big picture. From there, you can make a better decision for your financial planning.

Common Cash Flow

Common Cash Flow

Here is the cash flow diagram for an average working person. Let say that person called Bob. Bob need to have a 9-5 job in order to generate income to support his needs. This kind of income is called active income since he need to work to have the income. If he stopped working, his income stream would stop too.
With the actively generated income, Bob can choose to either save or invest part of his income into assets like fixed deposits, bonds, stocks and properties. The rest of his income will go to the expenses like food, insurance and entertainment. These are the basic needs to support his life.
Part of the things that he owns like car, house, and credit cards will incur debts. The interests that come with the debts will go to support other people. In other words, a part of the income from Bob’s hard work goes to pay for other people.
Not only that, there are things that are unused or underutilized that contribute to waste like extra clothing, expensive paintings, big house, etc. The waste and debt both play a major role in Bob’s cash flow. They eat away his income. I call this the leakage in the cash flow.

Leakage is a waste of energy in electricity term. For example, the electricity that is used to light a bulb will have part of its energy being transformed into heat which is wasted. High efficient light bulb will generate less heat (or waste). The same goes to the cash flow of Bob. The more leakage he has, the more energy he wastes working in he 9-5 job.
His work is transformed into waste. Not a good plan at all.

Ideal Cash Flow

Ideal Cash Flow

From the cash flow diagram in the previous section, it is clear that in order to make the cash flow more “efficient”, Bob need to eliminate debt and waste to avoid leakage in his cash flow. This, in turn, can reduce his expense.
Since Bob has a habit of saving and investing, his assets will grow over time. With less expense, he has even more income to contribute to his saving and investment. This makes his passive income from his assets large enough to cover all his, now reduced, expense.
There is a positive loop in effect here. The less expense Bob has, the more he can save and invest to grow his asset. Since he spends a lot less than before, his passive income from larger asset can cover easily his expense and therefore, he could literally stop working!
The final version of the ideal cash flow diagram is reduced to only 4 circles: big asset, income, small expense and you. The simplified cash flow is more efficient and once Bob achieves the final cash flow, he has achieved financial independence.
Once reaching financial independence, Bob doesn’t need to spend his life working anymore. Working is now a choice and not a must for Bob. In case he chooses to stop working, he has time to start full time living. What a wonderful plan.
Which cash flow diagram best describe your current financial situation now? Which one do you prefer to have? I bet the second one, the ideal cash flow.