It’s time to talk about budgets. A good budget is essential to financial security. One of the biggest indicators of financial intelligence is cash-flow and how you get that cash-flow.
The first step in knowing how you obtain your cash-flow is to understand your personal financial statement: income and expenses (income statement) and assets and liabilities (balance sheet). If you learn how to read your personal financial statement, you can see where your money patterns are letting you down and you can create a personal budget to address those poor money patterns.
A good approach to budgeting makes it a tool to help. There are 3 ways:
1. A budget shows you your monthly outflow:
Understanding where your money is going is the first step in understanding where you have problems. Once you know where you have problems, you can fix them.
2. A budget helps you understand what kind of cash flow you need:
Once you see the deficiencies in your income to expenses, i.e., how much you need to cover if you don’t have income coming from the form of a salary, you can understand how much you need to bring in each month in the form of cash flow—and you can make that the very first and most important expense in your budget so you can acquire assets for that cash flow.
3. A budget inspires action to get your cash flow:
Creating an investment “expense” each month, something we’ll cover a bit later, inspires you to get creative in how to make sure you meet that expense each month.
Don’t look at a budget as a way of comparing income and expenses. Rather look at it as a way to prepare for creating more money. Get cash flow rich. The first expense in a budget is the expense of investing. That then creates passive income that covers the enjoyable things in the budget later. In the process, you will create more money and attain more assets. The cash flow covers the necessary expenses.
Sven Franssen