Understanding Your Cash Flow


Advertisement

The cash flow is the most basic of all financial processes. Cash flow is the movement of money that is within your control.

Many startup businesses fail because they do not know how to manage their cashflow.


Advertisement

Similarly, many people struggle financially because of a lack of understanding of how money moves in and out of their possession.

Income and ExpensesNecessary expenses are self-explanatory.

These are the expenses you actually need in order to survive.

This includes food, water, electricity, and other bills.


Advertisement

Debt expenses such as mortgage, student loans, and auto loans are also considered as mandatory expenses.

On the other hand, discretionary expenses are not necessary and are usually just for leisure. Examples are alcoholic drinks,fast food, cigarettes, movie tickets, and video games.

If you compare your total necessary expenses with your monthly income, you should probably be earning significantly more money than what you actually need.

This is because you didn’t include your budget for discretionary expensesin this list. Unlike necessary expenses, you have more control on how much you want to spend when it comes to your discretionary expenses.

To start learning about your cash flow, you will first need to record two important figures: your monthly income and expenses.

By simply recording these two monthly figures, you will already know whether you can grow rich or not.

Rich people have a significantly higher income compared to their expenses.Because of this, they can save a big chunk of their income.

Let us first discuss the negative part of your personal cash flow, your expenses.Expenses- Expenses cause money to go out of your pocket and your overall control. It transfers ownership.

Thus, the money you pay for expenses can no longer be considered yours. Some types of expenses are important, such as the money we use to cover for our rent, food, utilities, transportation and our other needs.

Expenses become less important when they are spent on unnecessary items.In your cash flow sheet, expenses should always come with a negative sign.

It is subtracted from your monthly income so that you become more aware of the impact of your spending in your long term financial goals.It goes without saying that we want to keep our expenses low.

The lesser our expenses are, the greater our potential savings will be.expenses are, the greater our potential savings will be.As much as possible, we also want to keep expenses lower than our income.

If you fail to do this, you end up with a deficit for the recorded period.A person who always spends more than he earns will end up broke.Income- Income is the opposite of expenses.

It is the total quantity of money that you earn for a certain period. In this case, we record the monthly income.For most people, the income comes from their salary.

This type of income though, is fixed. You can’t rely solely on it to make you rich.You will need to turn your excess income into financial assets that will grow in value over time, and will create passive income for you.

In your monthly cash flow chart, the income should include all the money that you received in a given month. This includes your salary as well as other one-time earnings.

If you do some extra projects on the side, for example, and you receive payment for them, you should include this income in your chart as well.

In some months when you earn more money, your income will be bigger.If some unfortunate circumstance happens like if you lose your job, your monthly income will also decrease.

To become rich, you will need to maximize the time that you spend on productive activities and you need to make use of the financial opportunities available to you to earn passive income.

You cannot copy content of this page

Adblock Detected

Please Disable Your Adblock And Try Again