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What is Cash Flow?
You are like a river bed for your money. You have income on one end and spending on the other end… the “cash flows” through your pockets. Are you in control of where your money flows?
There is a critical order of importance in making cash flow decisions. What should come first…
…making my mortgage payment or buying a new living room sofa?
…paying for my car insurance or paying $250 extra on my credit card?
These are questions that many people have encountered at one time or another. If not answered correctly subtle patterns can develop over time and muddy up the waters a bit.
Most people take their income and go straight to spending it. Then when almost out of money for the month they say, “oh shoot, I should have put some money in savings this month but I spent too much; oh well, maybe next month.”
That is a typical example of reverse cash flow that many people fall into! They’re trying to make some of their money flow back up stream and into their savings account but it just won’t happen. Saving is more important than spending so it should happen first thing in the month (when I say first thing, I mean immediately after you get paid).
Here is the correct order of importance: protection (insurance), asset building (savings), liability payments (pay off that credit card!), THEN lifestyle (discretionary spending).
Why is protection first?
If you and your family are not protected against the things that could happen today then all the things you are working toward in the future could get wiped out in one event… car wreck, lawsuit, chronic/terminal illness, or early unexpected death.
Why is saving before paying off debt?
Liquidity. Would you rather have $10,000 in savings and $10,000 in debt or $0 in savings and $0 in debt? I hope you’d take $10,000 in savings. Really take some time to think about this and figure out what level of savings you need to feel secure.
Why is spending last?
If you know that you have taken care of all your obligations and saved money for the future, you can spend whatever is left and feel great about it!
Immediately after you get your paycheck, make sure the most important things get taken care of first. I’d take it one step beyond that… AUTOMATE the important things… schedule your insurance payments to be automatically drafted from your checking account a few days after your check is deposited. Set up an automatic transfer from your checking to your savings for the day after that… you get the picture…
Use the systems that are available to you so that the important things happen automatically without lifting a finger. Then you get to spend the rest guilt free!
So, close your browser, get off your computer right now and figure out how reverse cash flow might be hurting your family finances. Take steps to fix it today! If you don’t do it RIGHT NOW, what will it take to move you to action?
~Mike
Mike is a regular contributor to Strive For Progress, to learn more about him click HERE. Feel free to ask any questions via comment below or via email, info {at} striveforprogress {dot} com
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NEWS FLASH!!! Mike and Mae are NOW teaching personal finance at our new site called Spend Successfully! Click the link below to learn more!
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I know I’ve heard this from you before, Mike, but I’m going to print this out and keep it as a reminder! Thanks for the great advice.