Analyze Your Cash Flow

You want positive cash flow which is your expensed to be less than your income so that there is money left over to save and invest.

A $50 discrepancy each week can slowly add up to one heck of a lot of money over time. It equals $200 a month, $2,400 a year, $84,000 over 35 years. Now let's take this one step further. If you had the money in your pocket and had invested it in a retirement account, your $50 a week, assuming an 11 percent return, would have provided you with a golden nest egg worth $1 million. See why I think its so important to find even the smallest discrepancies in your cash flow?

Why, you ask, should this take you a month? Well, when you go to the ATM and withdraw $100 dollars, you need to account for that somewhere. Maybe it was dry cleaning, gas, groceries, and a quick stop for coffee and a bagel. Putting down $100 in the miscellaneous category every week will never give you a clear picture of your cash flow. And if you're going to start saving money, it's got to come form your cash flow. Knowing where you are spending habits so that you have a positive bottom line.

As with the net worth, you want positive numbers here. You want your expensed to be less than your income so that there is money left over to save and invest. If that's where you are and you're saving at least 10 percent of your gross income, congratulations. But if you are living paycheck to paycheck and have nothing left over for savings, you need to set up a spending plan.

What happens if you have a negative cash flow---that is , your expenses are running more that your income? You use your credit card to pay for everyday items such as groceries and gas for your car, You are over your head in debt, and if you're not careful and don't get a handle on the problem, you will find yourself drowning in debt, and if you're not careful and don't get a handle on the problem, you will find yourself drowning in debt. (You'll learn more about getting out of debt and setting up your spending plan in the "Managing Wealth" session.)

Knowing how much you have already accumulated and where you spend your money are two essential building blocks when putting together your financial plan. Even if you are using a financial advisor, he or she will ask you for your net worth statement and will want to know how you are spending your money.