Before the Budget Talk

     With the New Year come many resolutions as people seek to better their lives and improve their situations over the next 365 days.

Some people may make an effort to start going to the gym. Others may attempt to give up social networks for a period of time. A number of people will even sit down to create a budget – which is a great thing! Of course, we’re all about getting your financial house in order. However, instead of starting off the year by explaining budgeting techniques (which we’ll do in another post), we decided to introduce a critical purpose for budgeting in the first place.

     A budget, which is an estimation of the revenue and expenses over a specified future period of time, is an excellent tool for managing your money. It allows you to determine where spending can be reduced and how much money can be potentially saved over a given period of time. But in order to achieve financial freedom, you must budget to accumulate assets. In simple terms, assets are things that make you money. Some examples are real estate, stocks, businesses, and precious metals. The reason the rich are rich is because they focus on acquiring many, many assets.

     On the other hand, the poor and middle class focus on liabilities. Simply stated, liabilities are things that take money out of your pocket, like personal TVs, cars, clothes, and other consumer items. All of these things can potentially send a person to the poor house. The individual making the budget must know the difference between an asset and a liability. The unfortunate thing is that most consumers simply do not.

     Integral to the conversation of assets and liabilities is cash flow. Cash flow can be considered simply as the direction money flows in a financial transaction. Either out or in. As you probably guessed, assets have cash which flows in, or positive cash flow. Liabilities have cash that flows out, or negative cash flow. To build wealth and achieve financial freedom, work to increase your positive cash flow.

     It may be too simple to believe, but one difference between wealth and poverty is cash flow. A person can have too much cash flowing in or too much cash flowing out. The rich focus on building the number of assets they own. The poor and middle class, however, are usually trapped by too many liabilities or a lack of positive cash flow. With your new budget in the New Year, focus on building your assets. Having cash flowing in to you is the ticket to a life of wealth.