You may think or have heard the mantra “cash is king” but I have news for you.
Cash flow is king.
For a business to succeed, understanding your cash flow is essential. The same premise applies to your household finances.
Simply put, cash flow is the movement (i.e., flow) of money into and out of your possession.
Positive cash flow is very desirable. It means more money is flowing in than out. That money coming in can be used wisely for various wealth-building purposes, like investing.
Negative cash flow is not desirable. That means more cash is leaving your hands than coming in. It won’t take many days, weeks or months to not have enough cash to see if a business is going to fail. Suppliers and vendors start demanding their money. The same could be said for your household finances.
With negative cash flow, over time, you simply can’t pay your bills or finance your needs indefinitely. The cash must be in your account, ready to spend or save or invest.
This is where the process of cash flow planning and forecasting come in. It’s about making sure you know what money is coming in, and when. It’s also just as important to know what money is coming out, when, and to whom.
How can you generate cash flow?
There are actually many ways you can generate positive cash flow.
The easiest and most common might be from your occupation. You work, you get paid and you hopefully have some money leftover after your bills are paid.
Rental income is another way to achieve positive cash flow. This of course assumes your debt or other expenses associated with your rental properties are consistently less than your rental income.
There is also cash flow that can be earned from your stock portfolio or investments in general. This is one of our favourite methods; the method authors of this site have employed for many years.
The costs of poor cash flow management
Whether you make $50,000, $75,000 or$1000,000 per year, prudently managing your cash flow is probably the most important thing you can ever do.
In a world where marketing and consumer pressures are everywhere, it’s more important than ever to master this essential life skill.
To keep pace with others, you may feel compelled to own the latest technology, new vehicles, bigger homes, and pay for personal services related to health, home and general happiness.
Purchasing anything with your cash flow can be great, but, you probably can’t do it all.
Just like there are constant tradeoffs for your time and energy every day, the same will apply to your money. You’ll need to make decisions about where and how you want to spend your money. Cash flow management will help you do that. That’s important, but the consequences of not doing it well can be severe.
Beyond acute or chronic stress, other negative consequences that may come from not managing your cash flow. Those consequences can be detrimental to your personal well-being, your relationships and much more. In addition to the immediate stressors that a lack of cash flow can cause, you may also be damaging your chances to realize any longer term goals when it comes to how you may want to spend your time or your money. Instead of enjoying semi-retirement or working on your own terms, you could be forced to work much longer than you anticipated to make ends meet. Instead of providing for your kids’ education, to fund a big travel goal, or even get that newer car, those aspirations will remain tirelessly out of reach.
Ultimately, your day-to-day decisions about what you spend your money on, can make or break you.
In future posts, we’ll share why so many people get cash flow management wrong. We’ll highlight what you can do to avoid the costly financial mistakes of others, and we’ll share some tips on how to save and spend money on the things you value.
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