Managing Cashflow Effectively

Much props to Robert Kiyosaki's Rich Dad Series for teaching a good number of people about cashflow and it's importance in personal finance.

I was with the impression that these things only apply to a business. But this is not true at all.

It also very much applies to individuals than just businesses, given that it creates good financial management habits that could prove invaluable when we decide to start a business.

Moreover, the more financial structure we're able to bring into our lives, the better financial foundation we're able to build.

Generally, cash flow is defined as the movement of cash in and out of a business through income(inflow) and expenditure(outflow).

It's the same thing for an individual really in regards to his/her finances. Money comes in and it goes out as we conduct transactions. In some cases, as a seller and others as a buyer.

From a time aspect, a positive cashflow is when there's more inflow than outflow within a given time frame. Negative cash flow is the reverse.

In the case of many individuals, the whole process is mostly subconscious and rightly so. Since it is seemingly something trivial that we do on a consistent basis.

Of course, big expenses or incomes are hardly subconscious but these are often few in number compared to the rest.

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Tracking And Categorizing

Despite my love for numbers, I didn't see any significance or had any interest in keeping track of my cash flow. It felt like a chore at that time(some years ago) but I did it anyway often in a detached way.

At first, the sum and difference between income and expense was almost flat with only a noticeable change in some days.

Gradually and as the months went on, I had more data to compare and contrast from one week/month to another. This was when things started getting interesting.

For one, I discovered that it served as a good reflection of my financial activities, through this reflection I could see my own financial shortcomings and create appropriate ways to improve upon them.

The other thing was that tracking my cashflow was also a way to document my financial journey and it also gave me the ability to measure progress from how far I've come to how long it will take to reach a certain milestone.

Categorizing income and expense is a good way of better understanding cashflow, through putting them into various categories based on the source(income) and intended purpose of the money(expense).

When it comes to income, there can be various sources like salary, sales, commissions, dividends, interest etc.

Mostly, it is divided into two categories, which are active income and passive income. The former requires more effort on getting paid than the latter.

Just like with income, there are also various purposes in spending money when it comes to expenses. From the basic of needs like food and shelter to the pinnacle of wants such as travel.

Here, the traditional categories are fixed and variable expenses. The difference between the two is mostly the degree of flexibility. What I noticed is that when we decide to cut expenses, we usually work on reducing or eliminating(when possible) variable expenses.

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Fixed expenses are hard to reduce or even eliminate because they are unchanging. An example will be a monthly utility bill.

Savings, Investments and Debt

These three also play a part in the cashflow dynamic. Much of the reason for categorization is to effectively understand and manage the different aspects of it.

One could decide to pair active income with fixed expenses and make use of passive income for variable expenses or paying off debt.

Taking on debt in many cases is caused by having a negative cashflow. If one's income is less than their expenses in a given period of time, then they have a negative cash flow.

This means that they have more expenses than income and have to use their savings or borrow money to cover the difference.

What happens when the income is equal to the expense? In this case, we will have a zero cash flow, we're breaking even with no money left for saving, investing or paying off debt if applicable.

Positive cash flow is when we have money available to save and invest. Ideally, having more income than expenses is what we should aim for because it shows that we're able to live within our means. And we can use the surplus of money for wealth building.


Thanks for reading!! Share your thoughts below on the comments.