What is Cash Flow and How Does it Help You Build Wealth!

What is cash flow and how does the flow of cash help you when you are building wealth? Cash flow is a simple but very important term used in the financial world for the amount of money coming in and out of your budget. The more positive flow of cash you have coming in after all of your expenses are taken out, the wealthier you will become.

Your budget is comprised of several inputs and outputs. But you must separate your personal budget from your business's budget. When I say business, I'm not talking a major corporation. If you earn money from investments or businesses (passively) as an individual, this is considered business income or investment income.

Your personal budget is comprised of income and expenses. Your income usually comes from linear income sources, but you can also earn from passive income sources as well. The way the two filter into your personal budget is a little different though.

Linear income (from a job) goes straight into your personal budget and is mostly comprised of after tax dollars. It is applied toward all of your personal expenses, the remaining amount being cash flow, which can be positive or negative. Obviously, you want a positive cash flow at the end of the month so you can reapply that money to purchasing more assets.

Expenses are broken down into three categories: Fixed, variable, and budgeted. These are your total outflows of money throughout a given month.

Fixed expenses are your personal expenses that you must pay at a regular and recurring interval that never change from month to month. These are usually set amount expenses such as your rent or mortgage for your personal residence, your auto loan, or other various loans you pay on a recurring basis.

Variable expenses are those expenses that have varied amounts month to month but can be estimated or averaged in order to add to your budget. These are generally your utilities, insurance, and credit card payments that vary every month.

Your budgeted expenses are your general living expenses for the month. These include fuel for your car, groceries, clothing, medical bills, entertainment, fun, and other expenses that help improve your quality of life. Those amounts vary greatly from month to month if you don't set a strict budget for your spending. By simply adding set amounts each month to your budget, you can easily master your total outgoing monies each month in order to apply more surplus to your assets.

What is cash flow is explained by applying some simple math to your equation. After you calculate all of your linear income and subtract your three categories of expenses, your resultant is your surplus or deficit cash flow for the month, otherwise known as your cash flow. Your goal is to have a surplus or positive amount left over and as long as you don't have a deficit, you are okay.

A surplus is defined as how much money is left over from your budget after all expenses are paid. A deficit is defined as how much you spend in excess of your income. Both terms are used to evaluate and answer the question to what is cash flow.

The goal for your budget is to have all of your cash flow generated from passive income sources to pay all of your personal expenses. At that point, you won't have to work at a job or self-employment ever again. This is when you can retire from the work force and strive for your primary purpose in life.

Learn more about what is cash flow, how positive cash flow is generated and when you should start applying it to your assets instead of your personal budget.

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