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Cash Flow June 17, 2008

Posted by shaferfinancial in Uncategorized.
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This is the area that gets much attention.  Most people call it income and/or salary, which I think is a mistake.  Emotionally, calling it income or salary strongly attaches it to your job or more generally to the thought of a career.  Really, it is only incoming cash which could come from multiple sources.  Divorcing the incoming cash from the idea of work is fundamental to acquiring wealth.

Much attention goes to budgeting cash flow as it should because it is needed to feed the beast.  Here is an easy way to calculate cash flow.  Look at your main checking.  It should list your monthly deposits.  Add up your last 6 months of monthly deposits and divide by 6.  This is your average monthly deposit.  Now look at your outgoing cash.  Do the same, add up six months worth, and divide by 6.  Now look at your credit items like your credit cards and your home equity loan.  What was the balance 6 months ago?  Compare it to now.  Add the two items together.  For example, if your credit card balance was $1,000 six months ago and $1400 now add the extra $400 to the outgoing.  Vice versa if your outstanding credit is lower.

This should give you a quick look at your cash flow.  Now, if it is negative you have an issue.  Obviously, you can’t go on forever with a negative cash flow.  Some people suggest a full accounting by recording every item bought over a month.  For me, this is unecessary, but if you are inclined go for it.  

If you have little room between your incoming and outgoing then think about how to increase your incoming.  Maybe create a company which you can put together on your time off from your main job.  Many a successful company was started this way.  I always suggest working harder on incoming than outgoing money because it will create more wealth in the long run, but if you have a real spending problem, then get help.

No matter what, start thinking in terms of cash flow instead of self-limiting concepts of income, salary, career.  Those thoughts are money traps, keeping you from your potential!

Cash flow is the second most important concept to creating wealth behind working net worth, so figure it out today!

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