Cash Flow / The Fuel
Continuing with excerpts from my book “Principles of Prosperity,” here is Chapter 4 titled “Cash Flow / The Fuel.” In this chapter, we explore the concept of cash flow and why it is an important part of financial health. If you haven’t read “Net Worth / The Engine,” I recommend you go back and give it a quick read first. These articles pair well together and continue with my next chapter which is all about budgeting. If you want to read more, you can find the full text of “Principles of Prosperity” here, available for free download today.
If your net worth is the engine of your financial health, then cash flow is the fuel.
Imagine your net worth engine burning hot with everything in balance. You’ve eliminated high-interest credit card debt and made smart investment decisions. Your assets are growing faster. Your debts are shrinking. Your investments align with your goals. Your net worth is increasing every month. If you intend for this progress to continue, then you will need to keep providing fuel to keep the coals hot. This is where your cash flow comes in.
While your balance sheet and net worth are a current snapshot, your cash flow reflects your financial health over a period of time. Your cash flow statement shows all cash received and paid out over a specific period (incomes vs. expenses). It typically covers a month or year. Again, like your balance sheet, your cash flow statement lists incomes and expenses by category. (I can’t believe I got this far without saying “budget”!)
A cash flow statement helps you understand how your money is being used. Similar to a balance sheet, not all items on your cash flow statement affect your finances equally. Fixed expenses are items that are firm (groceries, utilities, debt payments) whereas discretionary spending may provide some room for improvement (dining out, entertainment, and vacations).
This statement can help you track your spending. It can also show if your income covers your expenses and how much is left over. Think of the “left over” as a shovel full of coal you get to throw in your net worth engine. I’m sure you’ve realized, that by cutting costs or boosting income, we can dramatically affect the size of that shovel!
Now that you have your cash flow statement, I want you to notice something unique about it: it is looking backwards. That is, it is a reflection of earning and spending that has already happened. Think of it as an “after action review” or “post mortem” view of your spending habits. By reviewing money already earned and spent, you can get a better idea of how much you’re really spending and whether it aligns with your defined values and goals (remember the lattes?)
Now that you have your cash flow statement, I want you to notice something unique about it: it is looking backwards. That is, it is a reflection of earning and spending that has already happened. Think of it as an “after action review” or “post mortem” view of your spending habits. By reviewing money already earned and spent, you can get a better idea of how much you’re really spending and whether it aligns with your defined values and goals (remember the lattes?)
This might be another moment that leaves you feeling a little exposed or embarrassed. But remember what we discussed earlier. Your planner has seen it all before and is eager to help you move forward.
Now that you know where your money has gone, it’s time to look forward.
Check back soon for “Budget / The B Word,” or download your free copy today.
