Money in, money out.
What is cash flow? A simple way to define cash flow is the flow of cash. Money comes in and money goes out. It’s that simple. Think of a bucket that has water flowing into it and holes in the bottom that allow water to flow out.
More in, less out.
Positive cash flow is living below one’s means. Their income is greater than their expenses. In essence, they are saving money for one or more purposes. Positive cash flow is analogous to the bucket filling up over time. Both the flow of water into the bucket and the quantity and size of the holes in the bottom dictate if this will happen. By increasing the flow of water or reducing the quantity or size of holes, one can increase the likelihood the bucket will hold water. How much these two variables change will dictate how fast the bucket fills up.
Account for every dollar.
It is also important that their budget be written in such a way that the savings is reflected as a line item in the budget. Allocating every dollar earned into a category is essential. This is called a zero based budget. If they don’t decide ahead of time what to do with the savings, new holes will appear in their bucket. They will find their proposed savings have all disappeared. So, positive cash flow means to spend less than you make and allocate the difference into paying off debt, building a 3 to 6 month emergency fund, saving for a kid’s college fund, paying off the house early, giving more and building wealth.
Here’s the Bottom Line
By reducing expenses and/or increasing income, one can go from having too little money each month to having positive cash flow. They are then in a position to turn that positive cash flow into savings. Doing this continuously over time will lead to an increase in net worth.
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