Understanding cash flow
Before you can create a budget, or spending plan, for the future, you need to evaluate how you're living now by analyzing your cash flow.
Cash flow describes the movement of your money—the money coming in and the payments going out. Whether your cash flow is positive or negative has a big impact on your ability to meet your financial goals.
Positive cash flow means that your annual expenses are less than your income. For example, if your salary is $50,000 and you spend $45,000 over the course of the year, you have a positive cash flow of $5,000. The good news is that you are probably living beneath your means and are already taking steps to save and invest for your future. At a minimum, you're able to pay your bills, cover small unexpected expenses and still have enough money left over to pay for some of the things you enjoy.
On the other hand, if you spend $55,000, you have a negative cash flow of $5,000. You may find yourself living paycheck to paycheck, spending money on unplanned purchases and never really being able to get ahead. If you have a negative cash flow, you can't save for the future or pay down any debt you may have. The longer your cash flow is negative, the larger the problem grows. The good news is that if you recognize this situation soon enough, you will be able to take steps to address the way you're managing your finances before it impacts the future you want.
Over the long term, positive cash flow can help improve the likelihood that you will be able to pay for your long-term financial goals, such as buying a house or enjoying a comfortable retirement.
Creating and sticking to a budget is an important and effective first step in gaining control of your finances and staying in control.