May 25th, 2008
Basics: Cash Flow
One of the sessions in the parenting class I teach has to do with money management–it’s in a parenting curriculum because it’s quite clear that as a society, we simply do not do enough to teach kids about money. Inevitably, the subject turns to the family’s finances, how to improve the situation, and debt.
While we do all kinds of mathematical exercises dealing with personal finance, there really is only one that matters in the short term:
income - expenses = cash flow
If your income is greater than your expenses, you have a positive cash flow and can create savings to use for future goals. If your income is less than your expenses, then you have a negative cash flow and are in debt. What is nice about the simplicity of this formula is that it points out that there really are only three ways to improve your cash flow:
increase your income;
reduce your expenses;
or both.
While many of the clients in my class ask about how to work on their debt, that concept is often too far down the line given where they are. While it’s arguable that you can do a few things prior to it, getting your cash flow under control and to a positive state is absolutely vital to your financial well being; without doing so, there’s no way you can pay your debt off. Stick to the basics when you’re starting off: figure out where your money is coming from and going to and get your cash flow positive! Increase your income with a second job, a different job, or overtime; decrease your expenses by figuring out where there’s waste and opportunity for sacrifice, and eventually, good things will happen.
