It’s essential to know where you are on your journey to becoming financially independent, and there is no better number than analyzing your net worth carefully. Since it’s the leading indicator to see if you’re on the right track to financial independence. But let’s dig in a little deeper, and explain how you can grow your wealth by managing your cash flow, because one who controls his or her cash flow properly will increase their wealth quickly.
We’re always reading stories about people who earn $50,000 a year from their job and somehow have saved $50,000, $75,000 or even $100,000 in just a few years. How is this possible? It’s because they’ve mastered their ability to manage their monthly cash flow. By definition, cash flow is the total amount of money deposited and withdrawn from your checking and or savings accounts each month. If you’ve accumulated more than you withdrew in one particular month, then you are cash flow positive, and cash flow negative if the opposite is true. The more cash you have at the end of the month, the wealthier you become. Pretty simple in theory, much more challenging in reality.
How to Master Your Cash Flow
If you want to have more cash at the end of the month, then you will need to create a detailed budget (which you can learn about here), be disciplined, and learn how to control your revenue and expense levers. Since most of us only have one revenue stream (our job), we can't control the revenue lever, but you can control the expense lever. Ideally, your goal should be to increase your revenue while keeping your expenses to an absolute minimum. So begin by going through all your expenses and finding what you can reduce or completely cut out. You will learn that it doesn’t take much to save money. For example, let’s say you buy a Venti Frappuccino from Starbucks for $4.45 every day before work. You may not realize it, but you're spending over $1,150 a year on coffee. If your salary is $50,000, then you’re spending 2.3% of your pre-tax salary on coffee. For those of us who say I can’t live without my Venti Frappuccino, well you can do one of two things; 1) drink your office coffee for free, and imagine it’s a Venti Frappuccino (what I do), or 2) find a less expensive alternative. Spend $2.50 on coffee instead, and you’ll still be saving over $500 per year. Do this analysis on each of your expenses, and I guarantee, you will find thousands of dollars' worth of savings that will add up quickly in a matter of months.
I am now going to introduce two tools I use to help you learn more about your net worth, monthly cash flow, and how to stay on budget throughout the month. Best of all these tools are completely free.
Keeping Track Of It All
Most of us have a savings account with one bank, credit cards with multiple banks, student debt with another, and a 401-K and other investments with yet another bank. Keeping track of all these accounts can seem overwhelming at times, but now there is way a see all of them on one screen. Personal Capital and Mint both provide a holistic view of your finances, by connecting your accounts online, to one platform.
Personal Capital and Mint provide you with your net worth, current cash flow position, budgeting tools, bill reminders and more. Using these tools will not only help you become more organized but educated on your finances. I highly recommend you use one or even both (if you're crazy like me), to stay on track.
One unique feature from Personal Capital is your “investable cash” number. This number is any cash that is not invested, and a great tool to watch since you don’t want this number too get to high. Once you have a 3 – 6-month emergency fund set up, you will want to invest your money, providing you have no other debt outstanding. Since cash sitting in the bank is losing value due to inflation every year. If you want to be conservative, then invest in U.S Treasury or highly rated Municipal Bonds.
Knowing where you are at any given moment is critical to growing your wealth. Thanks to Personal Capital and Mint you now can easily know and understand your current financial position. Please go check them out, and remember they’re both free.
Disclaimer: This post contains affiliate links. This means I may earn a commission should you choose to sign up for a program or make a purchase using my link. Please know I only promote companies that provide value to you and help you get closer to being financially independent! If you have any questions, please let me know. I will always put you first and being transparent is a top priority for me.