- Saving first and spending second is the habit that financially successful people of all ages have in common.
- At the end of the day, cash flow is the difference between what you have coming in and what you have going out.
- You want positive cash flow at all times in order to obtain favorable loans when you need them and to accumulate lifelong wealth.
***Not sure where your money is going? Download our free spreadsheet for help.
In all the years that I’ve been advising people about their wealth, the ones who are financially successful have only one trait in common: they save first and they spend second. When we look at all the many aspects of accumulating wealth over time, it all comes down to cash flow.
What is cash flow?
Cash flow is the difference between your income coming in (.e.g., your salary) and your expenses going out (e.g., money spent on your rent, home, cars, food, clothing, etc.). At the end of the day, you’d like to see positive cash flow—something left over after all your expenses have been covered. When we start off in adult life, many times we can only take care of our needs—the essential things. We can’t necessarily take care of our wants. That will come over time.
Remember, money is just a tool. You can only do so much with the tools you have, so you work within those means. When it comes to building wealth over time, often you need to take on some debt. Debt, of course, is an expense you have to manage and doing so is not easy. Debt is easy to take on, but harder to pay off, because it takes discipline and you’re doing so with after-tax dollars.
Bankers and others who might consider giving you loans someday want to see that you have a positive cash flow. When they see you have a positive cash flow, they have the confidence to lend you money to buy a home or car, start a business, or provide funding for all the other things that help you grow your wealth over time. If you keep your cash flow in order, and stick to your saving and spending plan, you can accumulate wealth by using debt smartly—and that will make all the difference as you go through life.
To that end, you can download a little spreadsheet we created to help you understand where your income is coming from and where your expenses are going. You can walk through that spreadsheet and hopefully “get really clear” about what you need to live on. Whatever your living plan happens to be, be sure to review it at least once every year to make sure you’re on track. You want to have something left over all the time. That’s even after saving first.
Until next time, enjoy. Gary