Your financial lifeblood 

If you asked a business owner to show you revenue (money in) versus costs for labor and supplies (money out), and he or she couldn’t do it, how would you feel about that business? Do you think it’s doing well? Would you invest in it? Probably not.

In many ways, your personal finances resemble a business, and cash flow (money in versus money out) is one of, if not, the most important numbers. It acts as your lifeblood, and understanding it is essential for building wealth.

Unlike the business owner above, you should know your cash flow and you want it to be positive. This helps you avoid bad debt, save and increase your value over time.

Even if you’re all about spending for today, wouldn’t you like to ensure you’re not wasting money on things you don’t care about?

No matter how you look at it, understanding your cash flow helps to indicate how well you know the business of you.

How do you figure out your cash flow? Simply take your annual income (after-tax) minus annual expenses. Annual expenses? If you’re like most people, you’re thinking, “I don’t even know where to start!” Don’t worry. Calculating and monitoring cash flow is easier than ever today because a number of applications do it for you.  You can monitor your cash flow on Eagle Strategies LLC Wealth Manager Platform, or from a public website of your choice such as Mint.com or Personal Capital.  Sign up, link your accounts and voila: you’ll see a list of individual expenses and a breakout out by category (i.e., groceries and entertainment). As you track, don’t be surprised if you say to yourself, “why in the world am I spending so much on that?” This is sure to be an eye-opening experience that should help you identify a few simple ways to tighten up the budget. In addition, many of these applications allow you to set spending limits and alerts on your smart phone when you go over budget to help you stay on track.

If you’re serious about your finances, take 15 minutes to sign up in the next 48 hours.  It’s a small step for you, a giant leap for your personal finances.

P.S. Below, you’ll find a manual cash flow calculation example. You will also see the massive potential of positive cash flow. Look at the last number on the table below to see the power of positive cash flow combined with the power of compound interest.

Cash flow example

Instructions:

  1. Take your salary times your effective tax rate.
  2. Subtract that number from your salary.
  3. Subtract your annual expenses.  That’s your cash flow. 

Example:

  1. $100,000 salary X 0.25 (25% effective tax rate) = $25,000 taxes
  2. $100,000 salary - $25,000 taxes = $75,000 after-tax income
  3. $75,000 after-tax income - $50,000 annual expenses = $25,000 cash flow 

Potential of $25,000 invested annually in a tax deferred portfolio that returns 7% a year:

  • After 10 years - $345,411
  • After 30 years - $2,361,520

Examples are hypothetical and for illustrative purposes only; not indicative of the actual performance of any particular financial product. Results are not guaranteed and do not include any product fees, expenses, or taxes.

The information provided is general, educational and not intended as an offering of any specific products or services, nor considered as specific investment, legal or tax advice. Individual situations can vary, and an individual assessment to your specific situation should be used.

*Please see the previous commentary for more on compound interest.