I believe that cash flow is one of the most powerful concepts in personal finance. People have a general 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.
What is Cash Flow?
Cash flow is basically your income minus 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 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.
How to Improve Your Cash Flow
Reduce Your Expenses
The best and easiest way to improve your cash flow is by cutting your expenses; especially expenses 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 goals.
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 $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 cut your expenses and save money.
Increase Your Income
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:
- Earn more from your job — i.e., ask for a raise, get a promotion, work overtime, move to a new company, etc.
- Earn more outside of your job. Here are a few additional income ideas for you to mull over.
- Make your money work harder — i.e., investing in the stock market, real estate investing, and other alternative investments, etc.
A Free Tool to Help Track Your Cash Flow
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 the money is flowing in and how you 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 screenshot of what it looks like:
- All of your transactions are automatically categorized, showing you where your money is going. You can click on the pie chart to drill down and see the detail for any category.
- You can view, sort, or search your transactions — all transactions from all your accounts are in one list.
What to Do with the Extra Money
So you’ve improved your cash flow, what should you do with the extra cash? Here are a few ideas:
- Pay down your debt — e.g., eliminate credit card debt, car loan, student loan, etc. As you do this, you’ll free up even more cash because you no longer have to pay all the finance charges and monthly payments.
- Invest your money. Again, make your money work for you and continue to improve your cash flow.
- Give. If you are in a position to give, charitable donation is also a great way to use your money.
I hope you enjoy this article, and more importantly, got a few ideas out of it that you can use to improve your finances.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.
Great Post! We recently freed up some cash flow by re-financing our car at a credit union. Credit unions typically have better interest rates and terms. Also, my husband adjusted his W-4 to increase the monthly cashflow. We may not get as big a tax return next year, but it’s better than letting the government borrow our money for free just to return it back to us next year. 🙂
It’s such a simple equation. Wealth = What You Earn – What You Spend. Yet, so easy to fall into bad habits if you aren’t careful.
Cash is king. it is also a great way to not get hammered by credit cards. for about 3 years now i have been managing my personal funds through the use of cash. when you only have $40 bucks in your pocket its hard to buy that $50 shirt.
thanks for the information great post.
Well, the creation of cash flow is easy you just should must generate little business that allow you to have time to control them and you are going to be rich… I think
Simple article, but very educational. Increasing your income is not that easy – or else everyone would be rich. That’s why the most money comes in when you can spend less.
It amazes me how much in common running a business and personal finance are. Cashflow is a term generally reserved for businesses, but also needs to be applied to our personal lives.
My theory on why everyone needs a budget is because successful businesses also have budgets.
Controlling expenses is important, and should be a habit. Ideally, learned from childhood. I know, not everybody had these habits ingrained in them from early on:) But these habits can be learned, and we can train ourselves to live within our means and pay ourselves first. Inflow must exceed outflow, and the difference should be enough to build investments on. Very important, in my opinion, is maintaining your career and cash flow. You earning capacity is the engine that drives your ability to make the money that will be saved in the first place. Without the income, there won’t be… Read more »
Cash flow is what it’s all about. I tend to focus a lot of my investment strategy on investing in solid blue chip companies that pay dividends and equities that pay distributions. Even though it’s in a taxable account, it’s liquid and that’s important in a lot of ways.
Cash flow is a must, you can’t be in debt-you have to save or create more than you spend. Simple. Although I over spend on my home, waterfront, think its a great investment, so I can put the expenditure into 2 categories.
You have to be creative. There are ways to increase your income. It’s only finding what works for you.
This is such a simple concept. If only it were so easy. 🙂
sucha simple concept, that really everyone should already know. If they had known it, then our savings rate wouldnt have been negative for years before this bubble burst. Hopefully we all learn something from what happened and will start to save money for the next inevitable economic downturn!
Very Informative and well-written article, I genuinely liked the tool you shared! Thanks