In my many conversations, both private and professional, I have the opportunity to observe areas that seem to significantly impact families and their personal finances. Amid discussions about investing and taxes, these foundational principles often take a back seat to cash flow. Allow me to unravel this essential concept in the next few minutes.
While questions about stocks, retirement plans, and taxes are valid and important, they tend to overshadow what I believe to be the cornerstone of personal finance – monthly cash flow. Before diving into investing and tax strategies, it can be crucial to understand and master this fundamental element.
So, what exactly is "Monthly Cash Flow"? It's as simple as subtracting your expenses from your income. I believe this seemingly straightforward equation holds the key to financial stability and growth.
I believe a positive monthly cash flow is the bedrock that supports all your financial endeavors, including investing. It's the source from which your investment dollars flow. On the flip side, a negative cash flow could lead to financial hardships and accumulating high interest debt.
Thomas S Monson has a great quote that I agree with: " I urge you to live within your means. One cannot spend more than one earns and remain solvent. I promise you that you will then be happier than you would be if you were constantly worrying about how to make the next payment on nonessential debt.”
Now, how do you measure monthly cash flow? Here are a few practical suggestions:
Budgeting Apps: Consider using an app that provides a detailed and granular approach to budgeting and tracking expenses. It can be an excellent tool for measuring monthly cash flow.
Simple Spreadsheet: If apps aren't your preference, a straightforward spreadsheet could work wonders. Update it monthly with your current financial figures for a quick month-to-month comparison.
Zeroing Out Your Bank Account: If you don’t want to track your monthly spending, you could start each month with a balance of a number you are comfortable with it being, for this example let’s say that is $3,000.Then have all your income and expenses flow through it for the entire month and then zero out your bank account, in this example that would be $3,000. This could at least give you a grasp on what you save regularly each month or aren’t able to save each month.
Why might this be crucial? I've encountered cases where individuals believed they had a positive monthly cash flow, only to discover missing money when examining their accounts. They assumed their expenses accurately but didn't measure or track them effectively.
Understanding your spending can be key. It's not about a poor grasp of income, which is usually straightforward. Spending involves numerous transactions, and measuring it may reveal uncomfortable truths, like paying for a neglected subscription or spending more than you realize on gifts.
In essence, personal finance could be like building a structure. Monthly cash flow would be the foundation upon which financial growth might be built. If you know your cash flow, you could be on solid ground; if not, you might be building on quicksand.
It is often the starting point I use to help you figure out how much assets you should try to accumulate for retirement. Your monthly cash flow affects so many things, so that is why I think it is the foundation to your entire financial picture.
Take control of your financial foundation – understand and master your monthly cash flow.
Feel free to reach out if you'd like to discuss this further or schedule a meeting to dive deeper into your financial plan.
Additional Disclosures: The material contained in the newsletter is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. All examples are hypothetical and are for illustrative purposes only