Previously we discussed the role of the money manager as an integral component of the family making sure the money is working as hard as possible for the family. Money is a fleeting asset. It spends very little time in our hands. Like water, its energy is seen in its movement. Stagnant money like stagnant water profits us little. Imagine a river flowing through your property. As the river passes through, the role of the money manager is not to capture as much water as you can as it passes through, but to control the flow and direction of your money. Don't stand in the middle of the stream with a bucket filling it up and dumping it in a reservoir, change the path of the river and direct it where you want it to go. The relationship between incoming and outgoing money from our possession is appropriately called the cash flow. Ideally, the flow should include multiple avenues, including our mandatory expenses, discretionary expenses, cash reservoirs, and investments.

When your income is modest, the bulk of the flow will be to mandatory expenses. As your income grows above inflation, you will find you have additional income beyond your pressing bills. At this point, the key is prevent too much of that money from going down the discretionary path without first considering the reservoir and investment. Discretionary expenses are the costs you choose to incur. These include dining out, entertainment, vacations, etc. People fool themselves into thinking that if it is not a mandatory expense it is discretionary and it should not be. It is better considered on a priority system. Mandatory expenses are priority one expenses, the rest a equal priority expenses. Extra money is quickly absorbed by the rest of the system and quickly diluted. The best time to manage money is to re-distribute it immediately before it can be absorbed by the discretionary or even the mandatory expenses. Don't allow yourself to justify a new car because of a raise, re-assess your income versus your expenses and change how much money goes to cash reserve, investing and discretionary. This is best done using multiple accounts and automatic transfers, discussed in in its own article: Money Management - Make it automatic.

When you are in control of the directions your cash flows, then you are truly managing your money, and are making it work for you. Just like stagnant water produces no electricity, stagnant money yields no dividend. Learn to keep a portion flowing past the holes of discretionary and mandatory expenses and watch it do something electric.

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