Why cash flow management is important before you start saving for goals

When it comes to money matters, there has to be a proper plan in place. A plan that takes into account each and every source of income and every bit of expense that goes into meeting the household expenses. Such a cash flow statement goes a long way in creating wealth over the long term. In other words, it is your own household budget, something similar to what a government does when it announces a Budget in the month of February each year.

Most of us spend a lot of time and energy looking out for ways and means to invest and finding the best investment options. Nothing wrong in that but it should not be the starting point of your investing journey. You need to give adequate attention to cash flow management as well which is the foundation ground for making better financial decisions. Personal cash flow, in my opinion, is the building block to achieve your goals, wealth creation and improve your standard of living.

Golden rule

Before you start investing for your short to long-term goals, a budget gives you a fair amount of idea as to how much you need to save. A golden rule of financial planning is to invest before you spend i.e. Income Minus Savings should be your Expenses. Most of us actually do the opposite and spend first and then save whatever is left at the end of the month. You need to reverse the process and see the results over a period of time in achieving your goals comfortably.

Personal balance sheet

Cash flow management is the process of determining your sources of income, your level of expenses and allocating your surplus towards achieving your short, medium and long-term goals. Month after month, many individuals look at their bank and credit card statements and are surprised that they spent more than they thought they did. To avoid this problem, one simple method of accounting for income and expenditures is to have personal financial statements.

A personal balance sheet summarizes your assets and liabilities in order to calculate your net worth. A budget or the personal cash flow statement is important because it allows you to identify where your income is coming from and how it is being spent. You can then use this knowledge to determine how many everyday expenses you are willing to sacrifice so that you can have more surpluses to put towards future goals.

The goal is to create positive net cash each month. Your net cash flow is simply the result of subtracting your outflow from your inflow. A positive net cash flow means that you earned more than you spent and that you have some money left over from that period. On the other hand, a negative net cash flow shows that you spent more money than you brought in.

Here’s why you need to focus on creating positive net cash on a regular basis.

– Positive cash flow allows you to pay down debt
– Net cash flow is an important input for investing in assets
– And positive cash flow increases your net worth.

The more positive money flow you have, the more money you will make. The more money you make, the faster you can build up your finances. The faster you build up your finances, the sooner you will achieve other important financial goals. Get personal cash flow management right, and wealth-building becomes a self-sustaining, accelerating process.

The bottom line is that personal cash flow management is an integral part of financial planning. Getting hold of your personal cash flow is like half the battle won for a better financial future. If you currently have a negative cash flow or you want to increase positive net cash flow, the only way to do it is to assess your spending habits and adjust them as necessary. By using personal financial statements to become more aware of your spending habits and net worth, you’ll be well on your way to greater financial security.