Cash Flow
Anyone who has studied finance has heard the term cash flow. The term is used in conjunction with personal finance, investments, passive income, and all the way up to big multi billion dollar businesses but what does it mean to someone trying to escape from rat race prison?
Cash Flow Explained
The concept of cash flow is not difficult to understand but is probably the most difficult to fix in our personal lives. Cash flow is simply your income minus your expenses. The resulting number is either a negative number, zero or close to zero, or a positive number (aka Positive Cash Flow).
Cash Flow Explained: The hard Truth
If you don’t put yourself in a positive cash flow position, you cannot start the journey of escaping rat race prison!
Income minus expenses is a negative number. Every month that goes by puts you deeper into debt. You need to change this circumstance immediately or you will be bankrupt.
Income minus expenses is zero or close to zero. In this case you are probably living pay check to pay check. You are not getting ahead and you are not getting behind. You have very little set aside for an emergency. If you or your spouse loses your job, your in trouble. The majority of Americans live this way.
Income minus expenses is a positive number (aka Positive Cash Flow). In short you make more than what you spend and this allows you to have a larger emergency fund or possibly invest in other income producing assets. This is where you need to be if you ever want to get out of the rat race.
Why is the simple concept of Cash Flow so hard to fix?
As I have attempted to demonstrate, there are only two variables that influence Cash Flow, Income and Expenses. I have also tried to be extremely clear that the only way to start the journey of escaping rat race prison is to create positive cash flow. In short, you need to make more money than you spend. Honestly, I think we all know this… we hear it all the time “live below your means”, “save your money”, “work hard and get a good job”, so on and so forth.
So to put yourself in a positive cashflow position you have three options.
- Increase your income
- Lower your expenses
- Do both increase your income while also lowering your expenses
Easy right?
Apparently not because according to a 2017 career builder survey, 78% of Americans live pay check to pay check. This is a scary place to be, as you are not in a position to weather any unforeseen storms.
I have spent countless hours trying to figure out why the general population would choose to live pay check to pay check and my best guess is that the majority of us never really grow out of high school mentality. I remember wanting Nike brand shoes, Air Jordans, and Guess jeans. I remember the kids who had new cars, the kids that drove lumps of crap, and then there were the kids who wished they had a piece of shit car (a little Adam Sandler reference there for you!). Why were those things so important? So that I could fit in, so that I would have a little more confidence, so that the other kids wouldn’t make fun of me? The list of reasons and circumstances could stretch out for miles and is probably different for each of us but here is the point. The majority of people continue to want the latest, greatest, and flashiest houses, cars, boats, clothes, toys, etc… The bottom line is if 78% of Americans are living pay check to pay check, then 78% of Americans own “stuff” that they cannot afford.
This mentality in adults is also known as “keeping up with the Joneses”. Which is simply saying that you are trying to keep up with your neighbors in both spending and social status. The funny part, is based off the fact that 78% of Americans are living pay check to pay check, chances are that you are trying to keep up with someone who cannot afford what they own either.
For the most part, people want to make more money and people are always interested in how to save money, but I think the majority of people stop there. They don’t truly understand their own financial situation, they don’t invest their excess cash that they create, and they don’t really have a financial goal in mind. All the general population really understands is that they need to make as much as possible in order to buy the next (fill in your blank here).
There is no easy way to reach a state of positive cash flow as once again there are only the two variables: What you make (income) and what you spend (expenses). For most it is easier and faster to cut your expenses and save money vs. waiting on your next raise. In order to cut expenses, you need to know where your money is going and what it costs on a monthly basis to run your household. If you can’t answer, literally right now while you are reading this, “How much does it cost to run my household?”… you are not in control of your finances. You should be able to answer that question immediately and be within $100 of the exact amount that it takes to run your household on an average basis. How do you know where you can save money if you don’t know what you spend it on and how much?
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