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What is cash flow and why is it so important?
Cash flow is the amount of cash that flows into and out of a business or entity.
When cash flow is positive, you have more cash inflows than outflows. This allows you to grow and expand either your wealth or your lifestyle. Both contribute to a rich life, and that’s a good thing.
So, the core of rich life living generally goes back to creating positive cash flow.
The term cash flow is most often associated with cash for running a business, but it’s also especially important for individuals. In this article, we’ll relate it to funding your personal wealth.
The question “What is cash flow?” is a smart one. Achieving goals from positive cash flow happens in 3 different ways:
- Investing your money to grow and compound for your long term or life goals
- Cover current living expenses and achieve short term goals
- Increase cash flow even more with investments that produce income that can be used to achieve short term or longer term life goals
In this article, I’ll give some common types of investments that apply to the 1st situation above; investing your money to grow to achieve goals that are longer term. They are:
- Traditional investments, like stocks or bonds, which are expected to increase in value (keep reading below; this is important) from the time they were purchased
- Real estate properties that are expected to increase in value from the time they were purchased
- Small business ownership that is expected to be profitable, including your own business
Notice that growing money is accomplished when the investments are made at a time when they are expected to increase in value. The probability of this happening significantly increases when you are aware of longer term trends or you use a financial adviser or fund manager whose goal is to capture trends. Of course, no one plans to not capture trends, but some services truly focus on capturing trends.
So, the investments described above are possibilities for what you can do with that “extra” money from positive cash flow to grow money for those longer term goals that you’ve defined.
As you can see, creating positive cash flow through smart spending, or my favorite way, income increases, is a huge contributor toward making a rich life both now and later.
Stay tuned…In my next “What is Cash Flow?” article series, I’ll address how to create cash flow to achieve short term goals.