Like any good business, it is important to always be cash flow positive. What does this mean? It means that you should always aim to spend less than you make each month.
This is really just common sense. It’s no different than being on a boat. You certainly don’t want to be on a boat that has sprung a leak, because eventually you’re going to be up over your head in water. This is no different when it comes to your personal finances. If you are constantly spending more than you make and borrowing money to do it, eventually those debts are going to start piling up over your head.
If you find that you are constantly taking on more debt each month and can’t find a way to save, then it might be time to take a look at your monthly expenses and see where some savings can be made. As an example, a young professional living in a large city in Canada, like Toronto, might find their monthly budget looking something like this:
Revenue is considered money that you take in. For most people this is their regular paycheque from their job. Expenses are things that take money away from you. If your expenses are coming out more than your revenue, then you are not cash flow positive. The goal is to become cash flow positive.
The next step is to examine your personal budget and figure out what expenses can be reduced or if revenue can be added. Unless you want to take on a second job, then expenses are the easiest things to pare away. Looking at the budget above, it might be considered that the $500 spent on restaurants seems like a lot. Can this be lowered? Can that regular Starbucks Grande Latte be replaced with a home-brewed Tim Horton’s coffee? It is somewhat surprising that the little things, like a simple coffee per day, can add up to over $75 dollars a month. Perhaps it’s better not to go out and party every weekend, but have a house party instead. That might save on the cover charges and liquor expenses. On top of that, can the cellphone plan be cheaper? Is it really necessary to have 5GB of data when you only use 100MB? Sometimes we pay more than we really need, and these expenses add up over time to put a drain on our finances.
Certainly one has to live and experience the life you want to live. You only live once, right? However, to achieve that, it might not take as much money as you think. Something to think on.
When you have identified the expenses that you think can be controlled, the next step is to set those goals. Applications like Mint or your credit card provider often support notifications through email or SMS when your monthly allowance is reached. This is a very effective way of controlling your expenses.
Once you have gotten yourself to be cash flow positive, then the real fun begins. Saving is the first step to building wealth. As your savings grow, many more opportunities will open up to you. We’ll explore some of those options later on. But for now, pat yourself on the back and congratulate yourself for having the persistence and dedication to getting your personal finances in order.