Ham's 4-Step Cash Flow Priority System

By following these four steps, in order, you’ll own a powerful tool to eliminate debt and create wealth.

Step 1:    Create a Cash Cushion
    …for life’s little emergencies
    $2,000 to $3,000 in a separate account from your checking
    Use it instead of credit cards

Step 2:    Become Debt-Free
    Pay off everything except your mortgage

Step 3:    Build Significant Liquidity
    Maybe up to a year’s income aside from retirement accounts
    For the good things or the bad things

Step 4:    Pay Off Your Mortgage
    Traditional – balance to zero
    Balance Sheet Method – offset account equal to or greater than the mortgage

Most of us have good intentions when it comes to money.
We intend to set aside some cash for emergencies.
We intend to pay of our debt.
We intend to put money into savings.
We intend to pay off our house — someday.

The problem is we’re trying to do all these things at the same time.

There’s no focus.  Money is spread so thin that we can’t see that we’re making any progress.

And, in time, we just give up!

We have developed a short 4-step cash flow priority system that provides a guide to the direction of our monthly cash in order of priority.  Simply stated…”as dollar bills come into the household budget (paychecks) what is the most effective way to allocate those dollars in order of priority to create the greatest long term financial benefit for you and your family?”

Step 1    Cash Cushion

Create a cash cushion…money on hand and readily accessible for life’s little unbudgeted emergencies.  We aren’t talking huge money here.  For a family of four earning $80,000 per year $3,000 to $5,000 should do it.  If you are self-employed or on commissions the number should be higher to account for irregular monthly income.

The purpose for this cash is to allow you to handle these emergencies with cash and not fall into the habit of always using credit for these purposes.  The biggest point I want you to learn here is that personal finance is almost totally about habits.  It’s not rates or fees or circumstances…it’s habits. 

If a person has good financial habits and consistently exercises those habits over a long period of time things will probably work out for them financially.  Most marriages end in divorce and most indicate money as a key factor in their divorce.

However, when an unexpected expense pops up, we tend to pull out the old credit card.  Our intentions are pure – we rationalized that we’ll pay this amount off when the bill arrives.

But when the bill comes, we ask ourselves “Would I rather pay this $400 now or maybe just the minimum payment of $20.00?  After all, we do have that beach trip planned next weekend and we need that money.” 

Next month we do the same thing – and the habit is formed.

Step 2    Become Debt Free

The idea here is to eliminate all non-preferred debt.  This would be all debt that isn’t your mortgage.

The number one reason to eliminate these types of debts is to free up monthly cash flow to form the habit of saving money and earning interest instead of paying interest.  

The key to financial independence is to have control of where your money goes and then to conserve (save) and not consume that money.

Step 3    Liquidity

Your goal should be to save one year’s salary.  We are talking big bucks here.  This is not retirement savings but true liquidity.  This is money that you can get your hands on for two primary categories of reasons – good things and bad things.

An example of the good things would be business or investment opportunities.  Most of the time you are presented with an opportunity there is an upfront capital/cash requirement.  If you have the money you at least have the option of taking advantage of the opportunity.

An example of the bad things would be major interruptions of your income.  This would include health issues, job layoffs or any economic downturn that is outside of your control.  By the way, the number one cause of home mortgage foreclosure is disability. 

You can see that if you had no debt outside of your home mortgage and one year’s salary saved in a liquid, safe, diversified place you would have gone a long way toward reducing or eliminating the financial stress in your life.  You would also have choices that most will never have.  You will be able to make decisions, both major and minor, without having finance as your number one consideration.

Where would you work or live if money wasn’t a factor?  What would you do with your time?  How would your relationship with your spouse change? 

Step 4    Pay off your house

Here’s where it really begins to get fun.  Most people dream of some day having their home paid off.  For many this is a far away dream and it seems that more and more people are starting to doubt they will ever be able to have a mortgage burning party.

Most also would define “having their home paid off” as not having a mortgage.  That, of course, is one way to look at it.  But wouldn’t it also be true that if you had a $400,000 mortgage, for example, and you also had $400,000 in investments you would, from a balance sheet perspective, have your home paid off?


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