When it comes to personal finance, two distinct mindsets shape how we make financial decisions: the ‘CashFlow Committed’ mindset and the ‘NetWorth Committed’ mindset. These mindsets play a vital role in determining our financial freedom and how we navigate challenges. Today, we’ll delve into these concepts and explore how a halt in future cash flow or income could impact our journey to financial independence.
Let’s start with the cash flow-committed mindset. This mindset revolves around relying heavily on future cash flow to finance our purchases. Whether buying a car, planning a vacation, investing in a training course, or splurging on the latest high-end mobile device, we often turn to loans, committing our future earnings to cover these expenses. The underlying belief is that the future holds endless possibilities and that making money will always be easy. As a result, we might only think about affordability if we assume everything will fall into place when the time comes.
If you find yourself constantly relying on loans and living with a cash flow-committed mindset, you’re not alone. It has become a common way of life for many individuals. However, this approach comes with risks we must be aware of.
| Cashflow Committed | |
|---|---|
| Pros | 1. Immediate access to desired purchases 2. Ability to enjoy experiences and possessions earlier 3. Flexibility in managing cash flow for current expenses |
| Cons | 1. Increased risk of falling into a debt trap 2. Potential financial stress due to loan repayments 3. Dependence on future income for repayment and expenses |
On the other hand, there’s the net worth committed mindset. Those who adopt this mindset prioritise building their net worth before making significant purchases. They prefer to pay for things using their accumulated wealth rather than relying on future income. These individuals are uncomfortable committing their future cash flow to a purchase. Instead, they focus on establishing financial security before indulging in material possessions. Even if loans are readily available, they decline, wanting to maintain complete control over their future income streams.
| Net Worth Committed | |
|---|---|
| Pros | 1. Financial security and stability 2. Reduced reliance on loans and debt 3. Freedom to make choices based on accumulated wealth |
| Cons | 1. Longer wait time for certain purchases 2. Limited access to immediate gratification 3. Sacrifice of short-term desires for long-term security |
Choosing between these mindsets can have a significant impact on our financial well-being. It’s essential to consider how these mindsets manifest in specific industries, such as the travel market. A notable transformation is occurring in this sector, driven by the emergence of Buy Now, Pay Later (BNPL) options. This trend has gained traction, allowing individuals to finance their trips using loans. The travel industry is experiencing rapid growth, with people eager to explore their favourite destinations. BNPL has become a game-changer, witnessing a remarkable growth rate of over 25% compared to the previous year. BNPL in the travel market is primarily driven by international travel, which attracts newlyweds and small families.
However, we must acknowledge the potential risks associated with this shift. While BNPL offers immediate access to travel experiences, it comes with a commitment to future cash flow. It’s important to reflect on the implications of relying on loans for travel expenses. What if our future cash flow is disrupted?
What if our income decreases?
These are crucial questions to consider.
As BNPL continues to gain momentum in the travel market, projected to surpass $42 billion in outbound traffic from India within the next two years, finding a balance becomes paramount. We need to seize travel opportunities while maintaining financial prudence. It’s tempting to indulge in immediate exploration, but it’s crucial to assess our financial circumstances, ensure affordability, and exercise caution when committing future cash flow to travel expenses.
If we take a closer look, we’ll notice a shift over the past few decades. In India, for example, the cash flow-committed lifestyle has become more prevalent over the last 20 years. Before the 1990s, it was uncommon for the average person to rely on loans for purchases. Instead, people prioritised saving and accumulating wealth before making significant expenditures, embracing the net worth committed mindset.
However, there has been a rise in buying first and paying later in recent years. Easy access to loans, societal pressure to match the lifestyle of our peers, soaring aspirations, and a reduced sense of control over our desires have contributed to this shift towards a cashflow committed mindset. Unfortunately, this approach often leads individuals into a debt trap, trapping them in a cycle of financial stress.
In conclusion, choosing between a cash flow-committed mindset and a net worth-committed mindset has far-reaching implications for our financial journey. While the allure of immediate gratification through loans may be tempting, it can hinder our long-term financial freedom. On the other hand, prioritising net worth and delaying certain purchases until we have achieved financial stability can pave the way for a secure and prosperous future. It’s essential to strike a balance, considering our personal circumstances, financial goals, and the potential risks associated with relying on loans. By making informed decisions and being mindful of our financial well-being, we can set ourselves on a path to lasting financial independence.
