Achieve financial success with positive cash flow by discovering the important balance between income and expenses. Dive into the dynamics of cash flow and why maintaining a positive average is key. Ready to gain control of your finances? Keep reading for insights and strategies!
Cash flow represents the balance between total income and total expenses. Positive cash flow occurs when income exceeds expenses. Conversely, negative cash flow occurs when income is less than expenses.
Whilst cash flow can vary between positive and negative from month to month or year to year, it is important for the average cash flow over a given time period to be positive.
Having a budget can simplify the calculations involved in determining cash flow. A budget can also help you identify if your cash flow is positive or negative, allowing you to make better decisions on your spending habits.
Examples of income
Anything that adds money to your bank account and/or increases cash flow is income. Income may include any of the following:
- Earned income: wages from a job, including commissions and bonus payments. This is the most common form of income. You trade your time for money.
- Interest income: interest can be earned from bank accounts. Interest income is proportional to the amount of money you keep in the account. This is a form of passive income, but one of the lowest yielding.
- Rental income: income earned from rental property and renting equipment such as tools, instruments and catering equipment.
- Dividend income: dividends earned from owning dividend-paying stocks. This income is partly passive in that you need to earn income to buy the stocks in the first place. However, the yields are usually higher than interest income.
- Profit income: income from making a profit on goods or services. This is common in businesses and can be highly scalable.
- Royalty income: income earned from selling a product, such as books, art, and music. Many of these types of products are scalable in that you make or produce once or periodically but can sell the product many times.
Examples of expenses
Anything that takes money from your bank account and/or decreases cash flow is an expense. Some common examples of expenses include:
- food and groceries.
- housing expenses including rental payments, utility bills and maintenance and repair costs.
- transport expenses including vehicle, fuel and public transport.
- business expenses.
- sports memberships.
- subscriptions for different services.
- leisure expenses such as streaming services, dining out, movies and holidays.
- loan repayments including personal loans, student loans and mortgages.
- credit and retail card debt.
Expenses can be categorised into needs and wants, which are covered in more detail here.
How to track your spending
Living from pay to pay is very common. People are often shocked after reviewing where their money is spent. Having this knowledge gives you the power to control your spending and manage your finances more effectively. “How to Stop Living Paycheck to Paycheck” by Avery Breyer (Link) is a valuable resource that has many strategies for escaping this cycle.
It is easy to access transactions in bank accounts by logging in to your bank’s website and listing transactions by type.
Most bank websites have advanced search features to limit the results that contain specific search keywords. Use this feature to your advantage to focus on different types of expenses, including fuel, groceries or streaming services.
Recent transactions can also be viewed using mobile device banking apps.
Check your transactions each month to see where you spend your money. Once you have this information, you can identify expense types that can be reduced or even eliminated. Determine whether an expense is a “need to have” or “want to have” to help.
Do you regularly track your cash flow? Leave a comment below to share how you track your income and expenses.
