The secret to financial success is positive cash flow.
Positive cash flow means that you’re earning more than you’re spending monthly. It means your cash inflows exceed your cash outflows.
And, if you have positive cash flow, you have the basis for building and achieving financial success. How you build that financial success depends on your long-term financial goals, personal risk tolerance and your existing lifestyle and habits.
Yet, no matter how wealthy you are or how much you earn in monthly income, you must manage your spending. Many professional athletes and entertainment celebrities have earned millions of dollars of income during a professional career only to file for bankruptcy during their lifetimes due to reckless or undisciplined spending. Consequently, spending matters greatly.
Cash Flow Basics
To accumulate wealth, you must spend less than you earn. This is the fundamental law of money:
[WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]
This law tells us three things about cash flow:
- If you spend more than you earn, you are losing wealth — a negative cash flow. Negative cash flow is generally an indication that you are living beyond your means and are likely incurring debt.
- If you spend less than you earn, you are accumulating wealth — a positive cash flow. Positive cash flow may allow for you steps to save, invest or even to pay off debts.
- If you spend equal to what you earn, you are neither accumulating or losing wealth — a neutral cash flow. Neutral cash flow is spending to the penny exactly what you earn.
Subsequently, the greater the difference or delta between earning and spending, the faster you lose (or accumulate) wealth. And, there are only three things you can do to increase your cash flow: spend less or earn more or do both.
Smart personal finance is very simple. Everything else — paying yourself first, investing ten to twenty percent of what you make, building an emergency fund — is done in support of and dependent on this fundamental law of positive cash flow.
References:
- https://farnoosh.tv/?s=Financial+sUccess
- https://www.getrichslowly.org/the-power-of-positive-cash-flow/
- https://financialwellness.utah.edu/counseling/cash-flow.php