The importance of understanding cash flow

Written by
Peter Dunn

There are a ton of ways to improve your financial life, and a ton of skills to help you get there. This blog wouldn't exist if this weren't true. Understanding cash flow is just one such important concept. Cash flow allows you to accomplish everything you want in life - as long as you treat it right.

Cash flow literally describes the flow of money into your household. It is also describes the flow of money out of your household in the form of expenses. You either have a positive cash flow or a negative cash flow. As I'm sure you can gather, a positive cash flow is when you have more money coming in than going out. Negative cash flow is the opposite, which creates a shortage in your budget.

Controlling your cash flow is the single most financially responsible thing you can do. Yeah, it's that serious. Understanding cash flow is a fundamental financial baby step, yet it's the one thing people gleefully ignore. This is especially true for people who make more money. The more money you make, the more you ignore cash-flow management. This is why increasing your income doesn't necessarily mean increasing wealth. Conversely, those who feel broke, usually do something about it.

Padded checking accounts, or a "buffer" as I like to call it, is a major factor in cash flow issues. Whether intentionally or accidentally, many people experience manufactured financial tranquility as a result of keeping too much money in their checking accounts. It's really dangerous. A checking account has a very low yield, meaning your money only gains a minimal amount of interest when it instead could be working for you. More importantly, and less obviously, it can ruin an otherwise perfectly good financial situation.

The only ways to increase cash flow is to either spend less money by controlling expenses or make more money.

The problem lies in the fact that making more money rarely results in a solution to your financial issues. In reality, more money actually highlights your poor behavior. Your best bet for increasing cash flow is to spend less by cutting expenses. Overspending is the behavior that got you into your current low cash flow situation to begin with, so it makes sense to address this first.

Hopefully, none of this is news to you. Hopefully you understand the importance of cash flow to your financial life. And hopefully, you are actively cutting expenses to enjoy a positive cash flow life.

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