Editor’s Note: Cash flow is one of the most important concepts to grasp when developing a financial plan. Simply put, it refers to the movement of money into and out of your financial accounts over a specific period of time. Cash flow is essentially a snapshot of your income versus your expenses, helping you determine whether you’re living within your means or spending more than you earn.

Positive cash flow means you’re earning more than you’re spending, leaving extra money to save, invest, or use for other goals. Negative cash flow means you’re spending more than you’re earning, which can lead to debt or depletion of savings. To grow wealth over time, it’s essential to focus on maximizing positive cash flow.

Breaking Down Cash Flow

Cash inflow includes all the money you receive, such as:

• Salaries or wages
• Freelance or side gig income
• Rental income
• Investment dividends or interest
• Other sources of income

Cash outflow refers to the money you spend, including:

• Fixed expenses (e.g., rent, mortgage, insurance)
• Variable expenses (e.g., groceries, utilities, entertainment)
• Discretionary spending (e.g., dining out, hobbies, subscriptions)
• Debt payments

Your net cash flow is the difference between your income and expenses. It’s the money you have available to grow your wealth through savings or investments.

The Hidden Drain on Your Cash Flow

While understanding cash flow is crucial, managing it requires vigilance. A common pitfall for many people is complacency, which allows parasitic practices by companies to unnecessarily increase your cash outflow.

Consider these two personal examples where I reclaimed hundreds of dollars each month by being proactive:

The Cable and Internet Bill Trap

Earlier this year, my combination cable and internet bill jumped to over $300 a month—an increase of about $120 in just one year. This was a parasitic load on my cash flow, so I investigated alternatives.

By switching from cable to YouTube TV, I reduced my monthly bill by over $100 while losing almost nothing in service. That $100 now goes into savings, but had I been complacent, it would have quietly drained my net cash flow.

The Homeowner’s Insurance Hike

In a more egregious example, my homeowner’s insurance increased by more than $2,500 annually. This is paid by my mortgage company from escrow, so it raised my monthly mortgage payment by over $200. I saw no legitimate reason for the increase—after all, I’d been with this company for seven years and never filed a claim.

Switching was a bit of a hassle; I had to get a quote online, talk to an agent, and notify my mortgage company about the change. But the effort paid off. I switched to a major insurer and restored my premium to its previous level, saving $200 a month.

Reclaim Your Cash Flow

By taking action on just these two bills, I recaptured nearly $300 a month—money I can now put toward savings or investments. If you examine your own expenses, you’ll likely find similar opportunities. It might be time to:

• Shop for new telephone or internet providers.
• Cancel unused subscriptions.
• Reevaluate recurring expenses for better deals.

The key is to avoid complacency. Don’t let unnecessary costs make others rich at your expense.

The Path to Financial Stability

Understanding and managing your cash flow empowers you to:

• Plan your budget effectively.
• Avoid financial shortfalls.
• Set realistic goals for savings, debt repayment, or investments.

By staying vigilant about your expenses and focusing on positive cash flow, you’ll build the foundation for long-term financial stability and freedom.

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