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The Importance of Managing Your Cash Flow

Frankly speaking, it seems quite funny to see so many people just trying to make more money to get rid of their financial problems. Most of them feel that making more money will mean a better life, and less financial burden or limitations. However, to me, they seem to be far from being truly right. While making more money may surely mean more opportunities to tackle your financial problems and get stronger financially, it doesn’t always turn out that way.

Money management – How important it is?

After all, there are so many lottery winners out there, who win millions of dollars only to go bankrupt in a surprisingly short span of time. Similarly, nowadays, we see so many millionaires who end up having to sell all of their personal property and everything else they own in order to pay off their liabilities and other expenses. In other words, the “riches to rags” stories are growing more and more common with each passing day. And surprisingly, less money is never a problem for such people. So what is? Well, in my opinion, it’s all about money management.

A lot of people don’t place any emphasis on their money management at all and simply put in all their efforts in making more money, which usually doesn’t help. They usually fail to recognize where their money is going exactly, and why they are being left with less money despite making more money. The thing is, they forget the important of managing their cash flow, which is one of the most important things everyone needs to take care of in order to achieve a better financial standing.

Understanding and managing cash flow may help even those who are making less money to grow stronger financially over a period of time. On the other hand, ignoring cash flow management may lead to even the high income earners ending up in a miserable financial position. So, how to manage your cash flow? The below given are some of the basic but important points that are sure to help you get an idea.

Tracking your cash flow

You always need to keep a track of your income and expenses, and see where they are heading. If your expenses are growing at a lesser pace than your income, well done, you seem to be on the right track. If your expenses are growing in line with your income, you need to work a bit of managing and controlling your expenses. However, if your expenses are growing without a substantial rise in your income, you need to make some significant changes in the way you manage your money matters.

Positive cash flow

You need to ensure that you always end up with a positive cash flow. Now, when I say positive cash flow, I don’t mean a bit more money left after paying all your bills. You also need to take into the account the inflation and taxes, in order to find out the effective cash flow. You also need to have a specific amount to invest and save as well, more on it in the next point.

Saving

An ideal amount of savings, in my opinion, should be something that helps you cover all your expenses for at least 6 months, without relying on any other source of income. Though this may not seem necessary to many of you, I’ve seen people having to move to their friends’ place or go through a really bad condition when they get hit financially. There is also always a chance of encountering some emergency condition which demands a lot of money.

Finally, you should ensure that you can withdraw your savings any time you want, even if you choose to invest them in a very safe investment option.

Investing

This includes everything, ranging from where you want to head financially over the next few years to your retirement planning. The power of compounding of money is phenomenal, but you need to invest the right amount in the right places. You need to find the right investment options for you, and then consider setting aside a particular amount every month to invest in them.

Finally, always remember, you aren’t supposed to save and invest money AFTER you’re done paying off all your bills. Instead, your cash flow formula needs to be “Income – Savings and Investment = Amount you can use for expenses”.

Cash flow pro tip

A great tip regarding your cash flow management would be to have a few good sources of “passive” income. This would ensure that even if you don’t have anything else to fall back on, these passive income sources will still come to your rescue, as well as help you stay stronger financially even in times of recession and other such conditions, where there is uncertainty regarding your job or your business starts tumbling.