Cash Flow and Net worth


Cash Flow and Net Worth – From Debt to Wealth

The Bottom Line: Achieving financial freedom is definitely not a one-off task. Establishing healthy financial habits is certainly a key to getting out of debt, but the fun doesn’t stop there. Keeping track of your budget and credit are important steps in building a strong financial foundation. However, in order to stay out of debt and build wealth, learn to control your cash flow and divert money into assets that build your net worth. Take the time to chart your financial situation, set your financial goals, track your changes, and most importantly, stay motivated.

Working your way out of debt is a fantastic achievement.

Why let it stop there? After all, it took time, effort and perseverance to create and implement a plan to get rid of your unhealthy debt. Now is a great time to leverage your experience and turn from paying off debt to building wealth.

Use the two building blocks, cash flow and net worth, to help you track your finances. Here are three steps that will help you stay debt free and build wealth.

  1. Chart your situation
  2. Track your changes
  3. Stay motivated

Chart Your Situation: Cash Flow, Net Worth and Financial Goals

As you are familiar by now, your budget is a prime tool to help you manage your finances. Your budget is divided into key categories including: income, monthly living expenses, debt payments, and savings.

Your cash flow is derived from your income and includes:

  • Inflows: Salary or self-employed income, interest, dividends, capital gains
  • Outflows: Losses from investments, monthly expenses (transportation, food, health, housing, etc.), one-off and seasonal expenses, and
  • Net-Cash Flow: Positive (bringing in more money than spending) vs. negative (ouch)

Your cash flow should also include monies that you are using to create wealth. This includes deposits into savings plans and retirement account, as well as investments in stocks, bonds, (other financial products), and real estate.

You can calculate your Net worth by:

  • Adding your assets (savings, real estate, auto, etc.)
  • Subtracting your liabilities (mortgage, auto loan, personal loan, credit card debt, student debt)
  • Calculating your net worth: Positive net worth means that you have built some wealth. Negative net worth means that you have accumulated more debt than assets.

In order to turn your cash flow into wealth (more net worth) set achievable financial goals. First, by setting a goal to pay off your debt you started the path to building wealth. Most often, paying off high interest debt is a better financial move than investing in a low paying CD. However, take into account that using your money (cash flow) wisely does not mean just paying off debt. Don’t forget to build wealth by keeping an emergency fund and building retirement accounts.

A great thought experiment is to take the money you were paying each month to get out of debt and think of how you can use that same monthly payment to build wealth and security. This can apply to a car payment you paid off or money used to pay off credit card or student loan debt.

Step 2: Keep Motivated

Building wealth takes time.

The power of regular payments on debt, constant deposits into a retirement account, and timely payments on our bills are all little steps toward building wealth. The earlier you get started, the more chance you have to build wealth and retire in comfort.

A great way to stay motivated is by giving yourself a reward each time you reach a financial goal. It doesn’t have to be a big or expensive reward, but definitely make it a meaningful one. It can be as mundane as a movie or dinner out.

Share your joy and success with others by posting your goal achievement on social media. Sharing your story can help motivate them to emulate your success, and the positive reinforcement you received boosts your motivation.

Step 3: Track Your Progress

In order to make sure that you stay on course, track your progress. For most people cash flow and net worth are dynamic. Income fluctuates, expenses vary, and investments fluctuate.

If you struggled with debt, then you know how important it was to cut down expenses, increase income and pay down unhealthy debt. Don’t let those important hard-earned lessons go to waste. Leverage your experience. The more you increase your positive cash flow, the more you can pay down debt, invest your money and build your net worth.

There is no doubt that charting your progress as you increase your net worth will bring great satisfaction.