Understanding your cash flow is vital to effectively managing your finances. While most people equate cash flow to a business, it also applies to your personal finances. In fact, managing household finances is very similar to managing small business finances. In either case, the goal is to have a positive cash flow.
Your money is constantly moving in and out of your checking, savings and other accounts. Check card purchases, written checks, canceled checks, transfers, automated payments, fees and other movement all equate to your cash flow.
Positive vs. Negative Cash Flow
At the end of the day, is your cash flow positive or negative? That is a question you must quickly answer to successfully manage your personal finances. For example, at the end of the month, if you brought home an after-tax income of $3,500 and you spent $3,000 on expenses, then you would have a positive cash flow of $500. However, what if you spent $3,700? Then you would have a negative cash flow of $200. The extra $200 would have most likely come from your credit cards. If this trend is not corrected, each month your credit card debt will increase.
Benefits of a Positive Cash Flow
Maintaining a constant positive cash flow means you will always have money to pay your known expenses and even some unforeseen expenses. Having a positive cash flow helps to ensure that you become financially free. This later equates to being able to pay for long-term investments, such as purchasing a home, investing in your child's college education and saving for retirement.