I believe that cash flow is one of the most powerful concepts in personal finance. People tends to know how they feel about their personal finance — e.g., whether they are comfortable or are struggling. Unfortunately, not too many people truly understand cash flow and how important it is to your finances. When you understand the concept of cash flow and know how to improve it, you give yourself tremendous flexibility and open yourself to a lot of opportunities.
Cash flow is basically your income minus your expenses. If your income is about the same as your expenses, you’re living paycheck to paycheck. If your income is higher, you’re in a good shape. And if your income is lower, you’re accumulating debt. Very simple isn’t it?
And here is the beautiful part. Once you understand the basic components — income and expenses — you can begin to take concrete actions to improve your finances. And you can break down the problem even further by looking at reducing individual expenses and improving your income.
The best and easiest way to improve your cash flow is by cutting your expenses; especially ones that are recurring month-to-month. The biggest bang for your buck is your mortgage, if you have one. Take a look at today’s best mortgage rates and see if it makes sense for you to refinance. Refinancing alone could free up several hundred dollars that you could use for other financial endeavors.
In general, expense reduction is easier if you are keeping a budget. If you don’t have one, you should start tracking your expenses and start a budget. The key to success in expense reduction is doing all the little things that add up and trying to take one small step at a time. Don’t try to reduce your expenses by 50% — it will never happen. Challenge yourself to cut $50 a month or a $100 a month. Once you accomplish that, go for another $50, and so forth.
To help you get started, here are some ideas on how to save money — actually, about a thousand ideas.
The other side of the equation is improving your income. This is harder than cutting your expenses, but there are things that you could do — even little things like moving your money to a high interest savings account helps you to earn more. Again, it’s all the little things that add up.
What about other income ideas? You can basically break them down into a few categories:
You can use Personal Capital to link to your bank and investment accounts, as well as your credit cards, and use their cash flow analysis tool to show you where money is flowing in and how your are spending your money. All of your expenses are categorized, so you can see how you might be able to cut in certain categories and increase your savings. Here’s is a screen shot of what it looks like:
So you’ve improved your cash flow, what should you do with the extra cash? Here are a few ideas:
I hope you enjoy this article, and more importantly, got a few ideas out of it that you can use to improve your finances.