Growing up, my parents always used to preach that “cash is king.” It was always stated like one of those proverbial phrases such as “patience is a virtue,” or “better safe than sorry,” that are universally assumed to be true. There is some truth in the statement, of course, as cash is the medium for financial transactions, but cash alone is worthless in terms of gracefully ruling your financial life. Cash flow is where it’s really at. Why? Because if you can create a positive cash flow, you can use it to exponentially grow your wealth. “The rich keeping getting richer,” as the proverbial saying goes, but that’s because the “rich” are cash flow kings – they use cash to create more cash flow. The more cash they have, the more cash flow they can create. In this article, I’ll show you why cash flow is king. We’ll cover what cash flow is, why it matters, the biggest problems that exist for both cash and cash flow, and finally, how to be a cash flow king yourself.
What is Cash Flow?
Cash flow is simply the difference between the amount of money that comes in every month and the amount of money that goes out. “Positive cash flow” would mean you make more than you spend. Positive cash flow is by far the best indicator of a person’s ability to live within their means and their long-term capacity to build wealth. Obviously, the more money you have left over every month after all your expenses mean the more money that can be put towards creating even more cash flow now or in the future.
Why Does it Matter?
Cash flow is the proverbial fuel for our fire with everything we do financially. In order to keep a roof over our heads, put food on the table, pay down debts, save for retirement, and have the freedom to pursue the experiences we enjoy, we need positive cash flow month-after-month. If we’re always behind on bills or never have any money left over every month, it’s impossible to get ahead. In order to increase your cash flow, you need to either lower your living expenses or increase your income (or both).
The Biggest Problem with Cash
We get paid in cash and we use it to pay for everything we pursue in life. Bringing in cash is obviously a good thing, but sitting on too much cash isn’t. Cash’s value erodes over time if it’s growth isn’t able to keep up with inflation. Low-interest-rate environments – like what we’ve experienced over roughly the past decade – are deadly times for sitting on large amounts of cash.
As a current day example, most retail banks still pay very low-interest rates on cash savings. If the most you could earn on cash in a savings account is 1% while inflation hovers at 2-3%, your cash’s purchasing power is eroded. In order to build wealth, it’s imperative that our investments, at the very least, keep up with inflation over long periods of time. So, we invest our cash in various ways, whether it’s in stocks and bonds, real estate, other businesses, or anything else capable of creating growth and/or cash flow.
*Tip: The only cash you should hold onto long-term is an emergency fund (as a buffer against unexpected expenses) and enough for a month or so of everyday living expenses that you keep in checking.
The Biggest Problem with Cash Flow
There is no direct problem, per se, with cash flow itself as, on its own, it’s neither good nor bad. I do, however, see people fall victim to the lifestyle creep all the time where they start making a lot of money but spending everything they make.
What ends up happening is they find themselves in a large amount of debt, which only spreads the fire. All their cash flow is consumed in servicing that debt and all other expenses that feed their lifestyle. Before you know it, they’re spending money just as fast as they can make it, never able to save or invest to provide for themselves in their future.
On the bright side, however, learning to harness cash flow is easier than you might imagine. It is possible to break free of that unrelenting stress of trying to get out of debt and barely scraping by. Financial freedom comes first entirely from mastering your cash flow. Cash flow kings are capable of building the foundation of empires from this skill alone.
How to Be a Cash Flow King
Most of us make a fixed amount of money every month. We’re likely paid a set salary and can expect a certain amount of money to be deposited to our bank account every two weeks. The bright side of this is that it makes it easy to build a budget. The hard part is sticking to that budget.
So many of us have a hard time managing our monthly cash flow. We haven’t figured out how to prioritize our expenses and create a system that can manage them. The easiest system to manage all this is to break your spending into 3 separate “buckets”, each with their own account(s):
- Fixed expenses – rent/mortgage, utilities, loan payments, etc. This should go in your main checking account.
- Discretionary expenses – groceries, dining out, travel, entertainment, etc. This should go into a separate checking account just for these expenses.
- Savings/Investments – emergency fund, down payment fund, retirement accounts, etc. Put any cash savings in a high-yield savings account.
After you’ve sorted out how much you can afford or need to allocate to each bucket, set up automatic transfers from your main checking account where you receive your paychecks. Here’s a quick example:
Discretionary Expenses Budget = $150/week ($600/mo)
Emergency Fund Monthly Savings Goal = $1,000/mo
- Weekly transfer of $150 from the main checking account to the discretionary checking account and spend budget from there.
- Monthly transfer of $1,000 from the main checking to a high-yield savings account.
To make it even easier, you could have these transfers occur the same day you get paid. This way, you can’t spend more than you’ve allocated for discretionary expenses, you’re making saving and living within your means a priority, and you are eliminating much of the fuss that often happens in trying to stick to any particular budget.
The easier you make your cash flow to manage, the more likely you’ll adhere to it long-term. The more you adhere to it long-term, the better the results will be!
If you’d like help building your own cash flow plan or simply would like to review your current financial situation in its entirety, please schedule a free consultation with us today.
Chad Rixse grew up in Anchorage, Alaska, but has lived in the Seattle area since 2007. He majored in Spanish at the University of Washington where he honed his fluency in the language and discovered his passion for travel and connecting with other cultures. He’s a self-professed golf addict who can never seem to get his fill despite still struggling to break 100.