Managing your money flow is the second step of building your financial house. It is like building the frame that the rest of the home will be built around.
The concept of managing your money flow is basically making sure that your inflow of cash is less than your outflow of cash. This process is called budgeting. When you create and follow a budget, you are living within your current means and you will avoid accumulating new debt.
When you take the time to create and follow a budget, you begin to see where your money goes each month. Armed with that knowledge you can cut back on some of those wasteful spending habits and free up money to start moving towards your goals.
Managing Your Money Flow Will Help You Reach Your Financial Goals
When you follow a budget, you can allocate money to reaching your financial goals. Maybe you want to save for things like retirement or a down payment on a house. Perhaps you want to start saving money to start that business you've been dreaming of. When you follow a budget, you have a plan to get where you want to go. When you have a goal and plan to reach that goal, your chances of getting there are exponentially increased.
Managing Your Money Flow Will Prepare You for Future Wealth
If you are always running out of money with your current income, chances are that you will have the same problem even if you earn more. Statistically, the more money you earn, the more money you'll spend. This is called Parkinson's Law. If you do not learn to manage what you have now, earning more money will not solve the problem.
Don't be fooled by appearances. Many of those high income earners are broke. All of their income is going to pay for their big mortgage, the credit card bills, and the car loans. They are just broke at a different level.
Managing Your Money Flow Will Teach You Discipline
Wealthy people understand the importance of managing their money. They exercise self-discipline and they save up for purchases and earn interest on their savings while they do it. Broke people tend to go for instant gratification and buy things on credit. Often, whatever they buy ends up costing them twice as much by the time they finish paying for the credit card bill.
In the long run, saving up for purchases will actually allow you to buy twice as much stuff compared to buying with credit.
Alternatively, you could have the same amount of stuff, plus build up a big investment account on the side with all the money you save by not paying interest on debt.
Managing Your Money Flow: Conclusion
Over the years of working in the financial industry I have actually met a lot of low income earners that had higher net worths than many doctors and lawyers. This is simply because they managed their money well and allocated a portion each month to go into long-term savings or investments.
Budgeting is the basic building block of financial success. When you can manage your money successfully, you can allocate money to reach future financial goals. You will also be learning important money habits that will serve you well for your entire life, no matter how much you are earning.
It's all set up for you to project and track each month's income and expenses. Plus, it will automatically total your numbers for the entire year and present the data as a graph so you can see where your money is going.
If you would rather not be bothered with having to manually track everything yourself, check out the Quicken Personal Finance products. With their programs you can automate a lot of the manual tracking you have to do with the traditional budgeting spreadsheets. It will save you time and provide you with the information you need to manage your money well.
Action Items
Start managing your money flow by using a spreadsheet or automated software. Figure out how much money you have coming in each month and allocate it to your needs and goals.
Start tracking where your money is going and look for areas where you can reduce costs. Some easy ones are buying lunches and coffee. Cutting out five coffees each week could save you around $50 a month.
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