Cash Flow Lesson

Cash Flow consist of the money you have coming in minus the money you have going out to cover expenses. Obviously it’s important to have more money coming in than you have going out or at least the same amount coming in as going out.

The most common cash inflow usually comes from your income from employment. However, you can have other inflows such as child support, rental income, dividends and interest.

It is very important that you maintain an overall financial plan that you can monitor and adjust as needed. Your financial plan has to be constantly monitored because it will change as you life situations change.

Ultimately at the end of the day you have to save because if you don’t save part of your income then what’s the purpose of having a financial plan? Saving 10% of your income is still a good philosophy to follow. It’s still prudent to pay yourself first.

Of course none of this is possible with out income so you definitely have to have a source of income to start with. After you have evaluated your cash inflow you may determine you need something to supplement your income.

If you have done everything right and have accumulated wealth you have to know how to manage your wealth. Wealth management is a very important part of your plan because once you accumulate it you have to protect your principal and figure out how to make your money work for you and earn you supplemental income.

Ok you are probably saying what does this mean to me and how do I benefit from this information. First of all you will know how much money you have coming in and how much you have going out. More importantly you will know if you have more coming in than going out. If you have more going out than in then you will need to adjust your spending to bring your finances in balance.

Once you have your finances in balance you are now ready to start your financial plan. The first step in the plan will be to create a budget that is achievable given your current situation. Ultimately you want to be able to plan your budget so you can save a minimum of 10% of your earnings. This may be difficult in the beginning but you need to carefully track your spending and eliminate unnecessary spending until you increase your cash flow.

There are a few things you can do to increase your cash flow but it is extremely important that you use the additional cash flow properly. If you own a home and have had it for some time you may have excess equity that you can take out by refinancing your mortgage. If you can do this the money can be used to pay off credit card debt. Again I warn you not to start using your credit cards again and creating new debt because now you are risking your home. This may free up even more cash because you may be able to deduct the mortgage interest from your taxes (check with your accountant).

Another option is to check the deductibles on your life, auto and home owners insurance and increase the deductibles. Increasing the deductibles will lower the cost of the insurance. You can put the funds saved in a mutual fund that will earn interest. If you need the money to pay your deductible for an insurance claim it will be there but if you don’t need it you will have saved that amount and ultimately increased your cash flow. Once you make it past the first year the savings will be addition income that you can add to your cash flow and use to increase your savings.

Retirement Finances

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