A Clear and Simple Cash Flow Definition

When you think of cash flow, you think of businesses, right? If the bottom line is black, all is well this month. If the ink is red, there's a cash shortage that could cause problems down the road.

Cash flow is part of your personal life as well. Just as with a business, if there's more money leaving than coming into your life, a chronic cash shortage could cause serious problems, like bankruptcy, foreclosure or higher credit card and loan interest rates.

The cash flow definition below will get you thinking about the importance of tracking and knowing about the inflows and outflows of money in your life. Once you know when to expect the shortages, you can prepare for them.

What Is Cash Flow?

Cash flow is basically your personal profit and loss statement, either on a monthly, quarterly or annual basis. If more money comes in during a period than goes out during that same period, the result is a profit. More out than in results in a loss.

We use the profit and loss statement analogy deliberately. If you plan to get ahead financially, which means eliminating bad debt (yes, some debt is good debt, because it can make you money) and accumulating assets, you need to make a profit every month.

In other words, you need positive cash flow, or more money coming in than going out, every month, month after month.

Yes, there will be the occasional month where expenses will exceed income, especially if there's an emergency—the car breaks down, a family member is injured and requires expensive treatment, etc.

But a consistent positive cash flow means that you'll have enough liquid assets available to cover those emergencies without forcing you to sell your silver and gold, pay with a credit card, or take on additional loan obligations.

Our Personal Finance Cash Flow Definition

We define cash flow as, simply, the total amount of money that comes into your life every month (positive) plus the total amount that leaves your life every month (negative).

We discuss what's included in a cash flow calculation and how to calculate cash flow here.

Summary

When it comes to your finances, and protecting your and your family's financial future, we recommend that you think of yourself as a business entity.

Always seek to increase your income and to decrease your expenses (although not at the cost of distancing yourself from family and friends, or creating hardship in other areas of your life—relationships always come first in our books).

If you use our simple cash flow definition, review what happened each month (to learn from any mistakes) and plan 6-12 months ahead (to reduce the number of mistakes), you'll always know when to expect those cash shortfalls that can play havoc on your plan to accumulate silver and gold assets.