What To Do Now That You Are Cash Flow Positive?

What To Do Now That You Are Cash Flow Positive?

I have many friends who have gone off to do graduate degrees such as medical, law or business school and are riding what I would like to call the U curve. When you are in your graduate program, most of the time you have a line of credit and negative cash flow, and once you graduate and start working, the U curve starts to bottom out as you start to make an income and begin paying off debt. Finally after a year or two of work, your income continues to grow and the debt starts decreasing more rapidly as interest begins to get smaller and you are paying off more principal. Today, I find a lot of friends and colleagues are in this part of the “U” curve, where they are starting to make a substantial income, with declining debt and are facing a net positive cash flow for the first time.

This is the point where you can begin to start saving for the future and start to take investing and savings more seriously. There are a few things to consider when you reach this point.

What Are Your Goals?

The first step with any investment is to create clearly defined goals, whether it is to attain something tangible such as fully paying off your line of credit or maximizing your TFSA and RRSP for the purpose of having enough capital to make a down payment on a house. It is important to have goals that you can work towards.

How Much Debt is Remaining?

Everyone’s situation is different as no two lines of credit and financial situations are the same. The main question to ask is “Whether your current cash flow is really enough to support your debt payments?”, “Whether your current debt level may preclude you from reaching your investment goals?” (Credit Scores and Debt Ratios that are used for purchasing a house) and “Whether you should continue knocking down your line of credit with some of your excess cash flow?” (The answer is, more often than not, yes).

Track Your Budget

Tracking you budget is an important step now that you are cash flow positive.  You don’t want to have the feeling of having money burning a hole in your pocket and a need to spend it on a short-term item instead of putting the funds towards your larger goal. I am not saying not to enjoy the extra cash flow, but rather, you don’t want to end up making “stupid” purchases. All of the banks have systems with their online banking to help you track your budget but this can be complicated if you have a Visa with one bank and your banking at another. There are a bunch of great apps and web based software such as Mint which can amalgamate your spending across various accounts to give you a better perspective of your spending and budget.

Set Up a Forced Savings Plan

When you start saving, it is important to use a forced savings technique to save a portion of your paycheck and send it directly to a savings account. This is best exemplified with the phrase, “out of sight, out of mind”. Most invest accounts or online banking accounts allow you to electronically send funds on a recurring basis to an investment account, whether it is an RRSP, TFSA, or a non-registered savings account. By automating this process, you are able to accomplish two goals; not spending the money you had allocated to savings (this is a big one) and secondly having one less thing to worry about in your hectic life (another big one).

If you were to move $250 to a TFSA each time you were paid bi-weekly in 2019, you would be able to maximize your TFSA contribution for the year with only a small draw on your paycheck each time. The same applies to your RRSP, and spreading your contributions over the entire year.  It is a lot more palatable to have paid yourself over the year than having to come up with your contribution on February 27th before the March 1st deadline.

Maximize Your Company Benefits

Many companies these days have set up Group RRSPs or defined contribution pension plans and, if a public company, Deferred Profit Share Plans for their employees.  The employer will match your contributions up to a certain % of your contribution. These contributions are great because your employer will take your contribution directly from your paycheck (Forced Savings) and match your contribution with “free” money.

Start With Simple and Boring Investments

When you first start investing, it is easy to be drawn to the hot investment of the moment. In the fall of 2017- it was crypto currencies, the last few years it was the F.A.A.N.G. (Facebook, Apple, Amazon, Netflix, Google), and in Canada in 2017 and 2018 it has been cannabis companies. These investments usually have done extremely well and there has been a lot of hype and excitement in these sectors. Often times, the extra excitement can lead to these investments extending their valuations too high as investors rush in to squeeze out every last dollar of gain and leads to a quick decline in the price like Icarus flying to close to the sun.

It is okay to start with a simple diversified ETF.  ETFs are able to provide you with a great deal of diversification without charging a large management fee to get started. You may not get outlandish returns but you also won’t blow yourself up. The key to success with investments over the long-run is to have a strategy in investing in high quality corporations that are able to continually increase their revenue and earnings, generate free cash flow to return cash to shareholders and reinvest in their corporations for future growth. While this strategy can be quite boring, by consistently repeating it, you will reach your investment goals. If a boring investment strategy is good enough for Warren Buffet, it will be good enough for me!

Re-educate yourself

Over the last couple of years you have been focused on your career and most likely you probably need to re-educate yourself with some basic financial literacy. The good thing is that just by reading this blog you are doing just that.  If you have any questions or topics you would like to learn more about, or if you would like to chat about your personal financial situation, please let me know any I will be happy to help. I might even write a blog post about your question because if you are asking you are not the only one.
 

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