March 28, 2024

Financial Flexibility

Posted on July 31, 2015 by in MoneyWise

Financial flexibility is the capacity to respond effectively to unexpected financial challenges or opportunities, such as emergencies not covered by insurance or highly attractive investments available for a brief window of time.

Financial flexibility is the result of three conditions, each of which is the result of intentional decisions. By Aug2015ManStretchingWknowing the three conditions and making them a priority, you can make choices that move you in a favorable direction.

The first condition is positive cash flow margin. Cash flow margin is the difference between how much cash you receive during a period of time and the amount of cash you disburse during the same period. Spending less than you earn creates positive cash flow margin. Developing habits that consistently provide for positive cash flow margin is the first step in building flexibility and is critical to long-term financial success.

The second favorable condition exists when an appropriate portion of your assets is liquid. Liquid assets are those which can be readily converted to cash. Mutual funds and high-quality publicly traded securities are relatively liquid. Real estate, on the other hand, is illiquid since it typically takes a fair amount of time, effort and expense to convert it into cash. Naturally, cash is the most liquid asset of all. Financial flexibility is enhanced when you maintain a cash reserve or hold other liquid assets that you can draw on promptly.

The third condition has two aspects, each of which must be present. The first part is a good credit rating and the second is borrowing power, or unpledged collateral that a lender will readily accept. While it is preferable to respond to needs or opportunities by drawing on your cash flow margin and liquid resources, sometimes access to borrowed money is beneficial or even necessary. Your margin and liquid reserves may not be enough to meet the need or opportunity.

The availability of borrowed funds and the costs associated with borrowing depend on one’s previous decisions. The people viewed most favorably by lenders are those who have:

— Maintained a positive cash flow by disciplined spending;

— Accumulated assets and positioned them prudently;

— Used debt wisely and repaid it faithfully.

Those whose history makes them less attractive will either pay more when they borrow or be declined when they seek to do so.

If you find that your financial flexibility is less than you desire it to be, the remedial course is clear. Faithfully pay your debts and other bills, reduce the amount you owe, exercise control over spending to generate a positive cash flow margin, and accumulate or reposition assets to improve liquidity. By doing those things consistently over time, you can better position yourself to weather financial storms and seize opportunities that come your way.

Alan Wallace

Alan Wallace

Alan Wallace, CFA, ChFC, CLU, is a Senior Private Wealth Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.

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