Cash flow. You might be thinking, “Cash flow? My cash doesn’t flow. It trickles.” Whatever your cash does, it’s a good idea to check your cash flow from time to time because it has a big impact on how quickly your net worth goes up.
Cash flow is simple. You look at the money coming in and you look at the money going out. That’s why it’s called cash flow. You’re tracking the movement of the money. Some comes in from your paycheck, maybe interest from a bond, or a rental property you have. And some goes out, maybe to pay your mortgage, food, or cell phone plan.
Cash flow is simple, but powerful.
The big question is, “Are you making more than you spend each month, or are you spending more than you are making each month?” It’s kind of an important question and kind of an important thing to know and keep track of. Why?
Let’s say you are spending more than you make a month. First of all, how can you spend more than you make? If you make $5,000 a month, how can you spend $6,000? Sadly, you can (and most people do) by using what? Credit cards! Yup. A credit card lets you buy a lot of stuff today but not have to pay for it for a while. In this way, credit cards, loans, or any debt allow you to spend more money than you have or can make.
By keeping track of your cash flow, you can see if you start to spend more than you make. If you consistently spend more than you make, you will bury yourself in debt, and this will wreak havoc on your financial success in life.
So that’s the first reason to focus on and pay attention to your cash flow, to make sure you are not spending more than you make. But what happens if you are spending less than you make? That’s what I like to call financial success. But you’ll never guess the three things you can do with that extra money. That’s coming up right after you learn about net worth.
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.