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You've estimated and determined your cash flow--now what?
Cash flows can be kind of exciting. Those lists of itemized
spending and percentages of total spending are the key to
accumulating wealth and fulfilling your financial goals.
The Latté Factor
Little purchases--coffee, cigarettes, CDs, magazines, and
so on--can make the difference between accumulating wealth
and living paycheck to paycheck. The latté factor is the
ability for these small daily expenditures--if invested in
tax-deferred retirement accounts--can amount to millions of
dollars.
For example, say you're 23 and don't believe that on your
paycheck you can save any more money. But consider $5 a day
spent on a latté and biscotti.
Over one year, $5 a day is nearly $2,000. Put into a retirement
account, it is reasonable to expect that this annual investment
could grow to $2,000,000 by the time you reach the age of
65.
Using Your Cash Flow Statements
Before determining your actual cash flow, make an estimate
of your cash flow using the same form. Comparing your estimated
cash flow to your actual cash flow can reveal eye-opening
spending habits. For example, the average household spends
more per month going out to eat than it does on groceries.
Click here to calculate
your actual cash flow.
Once you've determined your actual cash flow, the ground
is prepared for you to take concrete financial action towards
your goals. Contrary to common perception, financial health
and security can become a reality even with a very modest
income.
To accumulate wealth, what really matters is having a positive
cash flow. The reason why many people, especially people with
high incomes, live paycheck to paycheck is that they spend
more than they make on things they don't need.
Reducing Your Spending
The key to making your cash flow positive is to reduce your
spending. Another way is to make more cash, but since most
people have more control over what they spend than how much
they earn, managing spending is usually the best place to
start creating a positive cash flow.
The 3 exercises that follow will help you reduce your spending,
which ultimately will help you take advantage of the latté
factor.
Helpful Tips:
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Write down each expenditure. Doing this for
7 days to determine how much you really spend often
reduces spending automatically. People become more aware
of what they are buying and reexamine whether or not
is something they really need or want.
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Only pay cash. When we buy things with a credit
card or check, we don't feel the cost as clearly as
we do when we pull out crisp, hard-earned $20 bills.
Some people reduce their spending by as much as 20%
simply by paying cash.
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Never spend more than $100 without taking 48 hours
to think about it. The $100 ceiling is arbitrary--pick
whatever level is right for you--but the point is to
reduce impulse buys. Stores are designed to inspire
impulse purchases. By forcing yourself into a "cooling
off" period, the excitement of the moment may wear
off.
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How much will all those additional savings be worth if you
invest them? Use MsMoney.com's Value
of Additional Savings Tool, to see what these additional
savings could be worth to you.
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