It is impossible to build wealth without positive cash flow. No matter what your income, if you spend more than you make, you will always be broke.


High Income Doesn’t Guarantee Wealth

When I was a financial advisor, people would open up their financial lives to me. They would show me their pay stubs and their bank statements. We would look at their investments and their debts. The goal was always the same: to help them build a financial plan.

But, something else happened. I started to see patterns.

I saw families that were making six-figure incomes that were barely scraping by. And, I saw families that were earning at, or below, the median income (around $60,000 per year), that had strong savings and investments.

For example, there would be families making $10,000 a month (after taxes) that ran the risk of losing their home if they missed one paycheck. And, there were other families that were making $3,000 per month that had a nice emergency fund, some investments, and surprisingly, less stress about money in their lives.

The primary reason that those high-income families were struggling was that they were confusing cash flow with wealth.

This led to one of the most important realizations of my financial life:

Cash flow is more important than wealth.



What is Wealth?

Wealth, also referred to as Net Worth, is what you would have left if you added up all of the things you own (assets) and subtracted off all of the things you owe (debts). Wealth is measured at a point in time. For example, Mark Zuckerberg had a net worth of about $100 billion at the end of 2020. Yes, that is a 1 with eleven zeros after it. $100,000,000,000. That’s a million dollars… times one hundred thousand. One hundred thousand million dollars.

Each of us has a net worth. For some it is positive, for others it is negative. You can calculate yours. Just add up everything you own and subtract off everything you owe.

The important thing is that wealth is a single number at a specific point in time.

Think of Scrooge McDuck. He has his wealth in gold coins that he holds in a money bin. When you add up your net worth, you can imagine it stacked up in coins or hundred dollar bills.

Because wealth is a specific number at a specific time, it is static. It is just a pile of assets (or debt).


What is Cash Flow?

Cash flow, on the other hand, is fluid (just like the name implies). Instead of being measured at a specific point in time like wealth, cash flow is measured over a period of time. Cash flow is your income, minus expenses, over a set period of time.

If your income is more than your expenses then your cash flow is positive, which adds to your wealth.

If your income is less than your expenses then your cash flow is negative, which reduces your wealth.

Let’s look at an example to try to separate cash flow from wealth:

  • Let’s say you started 2020 with a net worth of $10,000;
  • During 2020 you earned $60,000;
  • During 2020 you spent $55,000;
  • Therefore, by the end of 2020, your net worth had increased by $5,000; and
  • At the end of 2020, your net worth was $15,000.

Money flowed in. Money flowed out.

And, because more money flowed in than flowed out over the course of the year, your cash flow is positive and you now have more wealth than you had before.


Positive Cash Flow is the Building Block of Wealth

Without positive cash flow it is impossible to build wealth. And, negative cash flow eats away at wealth.

Let’s go back to Scrooge McDuck. It does not matter how big that money bin is, if he takes money out but does not put money back in for long enough, then someday he will definitely go broke. I guess that’s why he’s spending his retirement running all over looking for treasure.

The power of money is not in how big of a pile you have. The power of money is in how it flows through your life.

For example, let’s look at a million dollars. Let’s say you retire at 65 with $1 million in wealth. If you are Scrooge McDuck you have it all in your money bin, where it is super safe, but it is not invested and it does not earn dividends or interest.

If you spend $50,000 per year, you will have 20 years until you are broke. So, you’d better hope you don’t live past 85. If you put your $1 million wealth in a money bin and just let your negative cash flow eat away at it, soon it will be gone.

However, if you invested your $1 million, it is possible to create a portfolio that generates 5% of income every year. That means the $1 million would be creating $50,000 per year.

So, if you retire at 65 with $1 million in wealth that creates $50,000 in income, and you spend $50,000 per year, then at age 85 you will still have the million dollars! (Plus or minus any changes in share prices). If you want to learn more about how to make that happen, check out my article about how to retire without ever selling any investments.

No matter how big your wealth is, if your expenses are more than your income, someday you will run out of money. But, if your expenses are less than your income, then you will never run out of money, and you will likely have more wealth at the end of retirement than you had at the beginning.


Four Pillars of Personal Finance

If you want to stop living paycheck to paycheck, and start building wealth, you need to have a strong financial foundation. That’s why I created the Four Pillars of Personal Finance.

  1. Spend less than you make
  2. Have emergency savings
  3. Have diverse investments
  4. Rebalance

As you can see, positive cash flow is the very first pillar. And, there is a good reason for that: if you don’t have the first pillar, you cannot build the second pillar, or the third, or the fourth.

If you want to be financially successful, you absolutely must spend less than you make. There are no exceptions, no shortcuts, no work-arounds.

I have heard every reason in the book about why this doesn’t apply to someone. “I live in a high cost of living area.” “Our kids don’t know the meaning of the word no.” “My parents never taught me about money.”

It doesn’t matter what your reason is, it doesn’t change the math.

No matter what your personal situation is, you cannot build wealth if you spend more than you make. If you spend more than you make, you will always be broke. Forever. No exceptions.


Take Control of your Cash Flow

So, if you need positive cash flow to eliminate debt and build wealth, then how do you take control? Well, I have good news and bad news.

The bad news is that taking control of your cash flow is hard.

But, the good news is that taking control of your cash flow is not complicated.

Sure, there are some numbers involved, but it really isn’t difficult math. There is no algebra, trigonometry, or calculus involved. It is just elementary arithmetic.

My favorite tool for taking control of cash flow is the Undetailed Budget.

The undetailed budget is just five numbers that you can manage and manipulate to take control of your monthly cashflow.

Worksheet showing how to calculate an Undetailed Budget

First, determine your Income. Then, subtract off all of your Recurring Expenses. That leaves your Discretionary Income.

Your Discretionary Income can only be used for two things: Personal Spending, and Savings.

If your Personal Spending is more than your Discretionary Income, then your Savings will be negative. And, that means you are spending more than you make and you are damaging your Net Worth.

Check out the full article on the Undetailed Budget for tips and ideas on how to manage yours.


You Will Never be Poorer than You are Today

When you take control of your cash flow, something magical happens. You change the trajectory of your entire life.

If you spend more than you make, then you are decreasing your net worth. And, if you continue that habit forever, then you will never have more money than you have today. Today is the richest day of the rest of your life.

But, if you always spend just a little less than you make, then you are always increasing your net worth. And, if you continue that habit forever, then you will always have more money than you have today. The longer you live, the wealthier you will be.

This does not mean you have to be a penny-pinching miser. You don’t have to be incredibly frugal. I always say: I’ll never tell you not to buy $5 lattes. I don’t care what you spend your money on, as long as you spend less than you make.

For example, if you fully fund a Roth IRA every year starting at age 30, you will have more than a million dollars invested by age 65. The current maximum contribution to a Roth IRA is $6,000 per year. And, the current median household income in the US is about $60,000.

So, the average person could put enough into retirement to become a millionaire, and still have $54,000 left for lifestyle and taxes. That’s only 10% of the average income to become a millionaire! You still get to spend 90% of what you make!


What to do with Positive Cash Flow

When you take control of your finances and consistently spend less than you make, your life will change. You will find a freedom and peace that is greater than you ever expected.

And, you will have some new choices to make: what to do with the extra money you don’t spend.

That’s why I created the 12-step plan to eliminate debt and build wealth.

You can dive into the full detail of the plan in that article. But for the purposes of discussing excess cash flow, let’s go through a high-level summary.

When you spend less than you make, the first step is to save a 1-month emergency fund. Then, eliminate your high interest (10%+) debt.

After your expensive debt is gone, then start investing into retirement to get your employer’s match, while simultaneously increasing your emergency fund to 6 months. Then, when you have 6-months’ expenses set aside, you can attack the rest of your non-mortgage debt.

After you are debt-free, except your house, you boost your retirement savings to 15% of your gross pay, start putting money away for your kids’ college, look into using an HSA to self insure for long-term care, and paying off your mortgage.

Then, when your mortgage is gone, you’re free! You can use your entire income to spend, save, and invest. You won’t have any guilt about your spending because you’ve been incredibly responsible, and it will be even easier to spend less than you earn because you have almost no bills.

That is freedom. And, that is why cash flow is more important than wealth.

Ask for Help

Winning in personal finance is surprisingly uncomplicated. Spend less than you make and you will become wealthy.

But, just because it is not complicated, doesn’t mean it’s not hard! Changing habits is one of the most challenging (and rewarding) things you can do. And, you don’t have to do it alone.

If you would like help building and executing your plan to eliminate debt and build wealth, let me know. I would be happy to help you out! Check out my Personal Money Coaching Services for more information.


Final Thoughts

A lot of financial advice says that you should start saving early, even if it is just a few dollars per month. Those early savings are not going to make you rich. But, it will get you into the habit of having a positive cash flow. You will see what it feels like to watch your wealth grow. And, that will make you want to see it grow more.

I have been able to have a positive cash flow every single year since I graduated from college in 2002. And, that includes 2005 and 2006 when I went back to graduate school. Sure, I had to significantly change my spending habits during those two years because my income dropped dramatically.

The most important piece of financial advice I can give you is to do your best to have positive cash flow every single year.

It is not reasonable to try to have positive cash flow every week or every month. Sometimes, you just have to make large purchases.

But, if your family makes $60,000 per year, then spend less than $60,000.

I know, that’s not very sexy advice. It seems pretty self evident. But, it needs to be said. Every single family I have ever worked with that is struggling financially breaks that rule occasionally… or even regularly.

If you want to be wealthy, make sure your cash flow is positive.

Every year that you have positive cash flow, you add to your net worth. And, if you do that consistently, then you will never have less money than you have right now. And, if you ask me, that’s a pretty great way to look to the future: knowing it will just get better and better as time goes by.

What to Read Next

For more information, check out these articles that offer more detail about these topics. Enjoy!


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