Cash flow is the money you have available to spend or save… and it’s perhaps the most important metric of your financial health.
To be precise, cash flow is the net amount of money flowing in and out of your accounts each month.
If you have more cash flowing into your accounts each month than out, you’re cash flow positive. If you have more cash flowing out than in, you’re cash flow negative.
Why is it so critical? Because positive cash flow gives you options.
It means you have money at your disposal for building wealth, securing financial protection, and creating an emergency fund. You may even have enough positive cash flow to treat your family to a nice vacation.
Negative cash flow restricts options. You may have to choose between affording necessities and building your future.
Fortunately, calculating cash flow is really simple.
First, write down how much cash is entering your primary spending accounts from all sources. That covers dividends, rental income, side hustle income, and employment income.
Note: You’ll want to exclude things like asset appreciation for your house or investment accounts—you can’t access that cash in a pinch, so they don’t impact your monthly cash flow.
Then, list how much cash is leaving your accounts each month. Remember to include everything from living expenses to money flowing into wealth-building accounts to the miscellaneous things that come up day-to-day.
Finally, subtract the total out-flowing cash from the total in-flowing cash.
The remainder is your monthly available cash flow. That’s your existing financial power for doing things like eliminating debt or going all out on building wealth.
If that number is closer to zero than you’d like, don’t sweat it. By completing this exercise, you should have an inkling of where you’re overspending so you can cut back accordingly. It may also be the wake-up call about your income—the best way to boost your cash flow is to increase your income!
But you won’t know where you stand until you do some number crunching and find out. Don’t wait—calculate your cash flow today, and then review your results with a financial professional.
Together, you can strategize how you’ll leverage—or increase—your cash flow so that you can begin building wealth.