The financial world is complex and trying to predict where the stock market is headed, what the average inflation rate will be, or what the Social Security program may look like in twenty years is challenging, if not impossible. But these are all things over which you as an individual don’t have control. Rather than worry about the items that you can’t control, my recommendation is to focus your attention and energy on the things that you can control.
When it comes to personal finances, one thing that you do have control over is your cash flow, or how you use your money on a month-to-month basis. Understanding and making smart decisions about cash flow is extremely important and is the foundation of a financial plan. Having a cash flow plan will allow you to better identify your values, prioritize and achieve your financial goals, and build wealth.
Identify Your Values
The only way to get your arms around your cash flow, is to do the dirty work of tracking where each of your dollars go on a monthly basis. This can be done the old fashioned way of keeping all of your receipts and entering them into an Excel spreadsheet or by utilizing new technology like Mint.com. After you clearly understand where each of your dollars is going, you are able to see what it is you value in life. The spending categories that are highest tell a lot about your life. This can be enlightening but also difficult to be faced with the reality of exactly what you are spending your money on.
Prioritize and Achieve your Financial Goals
It’s not until you have a thorough knowledge of where your money is going on a monthly basis, that you can begin to make adjustments to achieve the things in life that are really most important to you. For example, if you don’t understand your cash flow, spending $500 on a new television may just mean that your bank account decreases from $2,000 to $1,500; however, when you understand your cash flow you can better understand the opportunity cost of any use of your money. Buying that new $500 television means that you have $500 less for your next vacation or $500 less to give away. Knowing your cash flow allows you to make choices that better align with your larger vision for your life.
The best way to build wealth is to spend a little bit less than you make and do it over and over again. When you have a good understanding of where your money is going you can ensure that you are spending less than you are making each month and then you are able to save some for the future. If you spend more than you make, you will never save money and it is impossible to build wealth unless it is given to you by someone else.
What about you? Do you understand your cash flow? Does how you are spending your money align with your values? Is the way that you use your money helping you to reach your financial goals and build wealth? If the answer to any of these questions is no, Iet me know because I specialize in helping people understand their cash flow and building a financial plan around it.
Photo courtesy of Ken Teegardin