How to Build Wealth through Cash Flow Management

Your income is one of your greatest financial assets and tools, so it’s vital to look after it.

Yet how many of us arrive at payday only to find that all sorts of bills and expenses have arrived and we have spent most of our money before the day is even over?

Heaven Knows Where the Money Goes

It seems that everybody else has their hand out for your money first while you are the last to get anything, if at all.

Even if you do have some left over, it seems to leak away over the coming weeks until you’re hanging on for the next pay cheque.

You may have heard that the way to solve this is with budgeting, but that’s only part of the solution.

The real trick is to analyse and understand your cash flow. Once you know what’s really going on, only then can you take control of your finances and start to make a real improvement to your financial position.

Understanding cash flow of course is part of running any business, and that’s the point: You must start thinking of your financial self as a business and manage your money accordingly.

Motivate to Accumulate

Even so, cash flow analysis/budgeting isn’t the complete solution. Unless you have the motivation and discipline to achieve your financial goals, cash flow analysis/budgeting on its own is like having a one legged stool. You need the other two to make it work.

Your Goal – you need a big reason why you want to be on top of your finances. Something that’s going to motivate you to take the actions you need to take to achieve it.

Your Discipline – Once you have a desirable goal, you need the discipline to practice the good money habits contained in this blog post and the next one.

Your Knowledge – Your cash flow/budget analysis  will let you clearly see where your money is going and what it is doing. Once you know that, then can you start to improve it.

What follows are the first three steps to understanding your cash flow and getting control of your money.

First Steps

Step One – Create a Cash Flow Snapshot

  • This is simply a budget, but not to stop or reduce spending; it is just to let you know what your money is doing
  • It shows you what it really costs to run your household
  • To help you do this we have created a Cash Flow Analysis/budget planner for you to download
  • Get your savings and credit card statements for the past six to 12 months
  • Go through them and start to fill out the spreadsheet
  • Work out what it costs for all the items on a yearly basis
  • Then calculate the monthly figure by dividing by 12
  • Yes, this is going to take a bit of work, so remember what we said about goals and discipline

Step Two – Study Your Cash Flow

Once you’ve completed step one it should be easy for you to see what your money is doing. (It may even be shocking, but that’s good.)

So study and analyse what your money is doing and then categorise the expenses into two areas:

Necessary Spending – This is things like loan repayments, rent insurances, utility bills etc. All the things you absolutely have to pay.

Luxury Spending – This is really everything else. While some things might seem like essentials, they are not, so be ruthless in what you put in here: holidays, clothing, entertainment, takeaway food, dining out, morning cappuccino, gym memberships etc.

Then total the two sections.

You now have an amount for necessary expenses and another for luxury spending.

Step Three – Reduce Your Luxury Spending

You probably knew this one was coming, but the whole purpose of doing this is to control your money and build your wealth.

So look at all the items in this section and decide which ones you can cut back on or even do away with completely.

If you do it honestly, you’ll probably be surprised at how much money you can recoup.

Remember; unless you have a worthwhile goal it will be all too easy to just keep spending on little luxuries.

Even More Tips in Part Two

That’s it for now, but in part two of this series we’ll show you even more ways to recoup your income and how to develop good financial habits that will help you build your wealth.

For now, check out our cash flow analysis/budget planner to help you get started or if this sounds like too much hard work, contact PEB Financial Planning to have someone do all the hard work for you.


*This article is for general information purposes only. It is not intended as financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified and registered financial or investment adviser.

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