Staying out of debt, meeting your expenses, saving for the future...we all know we should be doing these things, but sometimes it seems so hard. But what if we told you there’s just one thing you need to master to obtain the financial freedom that comes with being debt-free and having a big, fat savings account? Can you guess what that is?
Investing?
Nope.
Living like a miser?
Uh uh.
Making more money?
Not even close.
What it all comes down to is managing your cash flow. And the best part is, if you can get this one thing right, everything else – like saving, investing and steering clear of debt - will be a piece of cake (and you can eat it too)!
What is cash flow?
Cash flow is a term that’s often used in business. In essence, it refers to the stream of money coming in from revenue and going out to pay expenses. Sounds a lot like your own finances, right? That’s because it is!In business, positive cash flow – when what’s coming in is higher than what’s going out - is considered an essential indicator of a company’s well-being. Having enough cash around means having enough money to pay the bills and keep things running smoothly. The same is true in any household.
Cash flow, then, is solid financial ground. Sure, you can use credit cards and lines of credit to keep things running, but that’s like stepping into financial quicksand. Keep spending this way and before long, you’ll have disappeared beneath its slimy surface. It’s also why when a company gets into a situation where it can no longer pay for things with cash (i.e. savings, revenue and income), it’s considered to be a less-than-attractive business opportunity.
So how can you achieve a positive cash flow? Well, it’s rather simple. Unfortunately, that doesn’t mean it’s easy.
The 5 steps to positive cash flow
Keeping spending and debt under control can be daunting, but if financial security is your goal, managing cash flow is really the only way to get there. Achieving and benefiting from positive cash flow is, at least in theory, very simple. Here’s how to do it...- Calculate your monthly take-home pay and any other income you receive.
- Pull out your bank and credit card statements and add up your expenses.
- Make adjustments so that income exceeds expenses.
- Use the difference to save for the future and pay down any debt.
- Repeat indefinitely.
Simple, but not easy
Okay - so we’re clearly simplifying things here. For many people, accomplishing this will be very difficult and take years to get right (if ever at all). We’ll start by saying that not making enough money to meet basic expenses is a very real problem for some individuals. If that’s the case for you, the first step to turning things around will involve finding higher paying work – or getting the skills you need to land a better job. But before you decide that your income’s the problem, remember that many people who struggle with their finances make plenty of money to survive. They just spend all of it – and often so much more.That’s why achieving positive cash flow is simple, but not easy. It involves being honest with yourself about what you really need, and being willing to cut out the rest. It involves making a commitment to living within your means and accepting that that lifestyle may not be the one you covet. Finally, it involves making a few sacrifices upfront to avoid more trouble down the road. For most people, this is not the kind of behaviour that comes naturally. It’s painful, slow and involves many setbacks.
Indeed, when you work hard for your money (and we know you do), eliminating things that you enjoy – like vacations, restaurant meals and even your daily latte - can be a big, bitter pill to swallow. But there’s a reason why investors often kick companies with poor cash flow to the curb: the likelihood that they’ll go bankrupt is just too high. The same (sadly) is true for you.
The rest is gravy
Once you get your cash flow under control, the other part of the equation – paying down debt and building up savings – becomes much easier; these become simple cash expenses. Plus, as you chip away at any debt you’re carrying, you’ll benefit from better cash flow as your interest expenses and debt repayments shrink. What this means is you’ll have more cash on hand for saving – or even for something fun (you knew that ‘freedom’ was in here somewhere!).We won’t go so far as to say that money will solve all your problems, but having positive cash flow does help you move beyond living paycheque to paycheque and the reliance on debt to make up the difference. The fact that this simple step also makes saving and investing easier is just the icing on your (financial freedom) cake!
From Goldengirlfinance.ca/ Posted by Mags
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