Financial Fitness: Cash flow & Net Worth

Here is a simple truth about money:   In order to get where you want to go, you have to know where you are.
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​When it comes to personal finance, knowing "where you are" means tallying your net worth (what you own minus what you owe) and calculating your cash flow

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These principles are not complex and yet, according to research data by the Financial Industry Regulatory Authority, 63% of Americans are financially illiterate. They lack the basic skills to reconcile their bank accounts, pay their bills on time, pay off debt, and plan for the future. 

Now more than ever, there are terrific tools to track cash flow, build a balance sheet, create a budget, and monitor one’s financial progress. Mosaic Fi provides (eMoney) through the MyMosaic portal to all our clients.  eMoney tracks spending, compiles a balance sheet, and provides investment asset allocation in real time for each of our clients.  

What is Cash Flow?

Cash flow measures income less expenses.  The difference, when positive, is a healthier approach to building net worth.  With positive cash flow, the ability to contribute to savings, meet one’s goals, and/or debt reduction are possible. If the difference is negative, the outlook is much gloomier and will have a negative impact over time on net worth.  Negative cash flow is usually not sustainable unless you are the US government or have a bottomless pocketbook.  Bottom line, controlling cash flow is critical to building wealth and enjoying the freedom to live your life on your terms.
Why do I need to pay attention to cash flow?

We often talk about setting goals when it comes to financial planning.  Achieving goals is usually dependent on pulling the levers of cash flow whether it is earning, spending, or saving money.   These levers are three of the few things over which you have control.  Like a physical fitness program, exercising financial control leads to financial fitness and freedom.  Our goal at Mosaic Fi is to partner with you to grow and maintain your financial fitness through regular planning sessions.

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What can I do to improve my cash flow?  

These five simple tips can help you increase personal cash flow.

1. Boost your income. Depending on your situation, bringing in more money may be easier than cutting back on expenses
2. Cut your expenses
3. Pay off debt
4. Refinance your debt
5. Plan for infrequent recurring expenses

How can I do a better job of monitoring cash flow?

1. Keep a cash flow forecast
2. Keep on top of payments
3. Tighten up on your expenses
4. Anticipate problems before they happen

What is "net worth?" 

What you own minus what you owe

Why is net worth important?

Net worth is a measurement of your current financial situation.  Some people like to review their net worth on a monthly, quarterly, or annual basis.  When applying for a loan, the lender will always ask for a net worth statement and may even give you their form (personal financial statement) to complete.  This gives them a snapshot of your financial assets and obligations.  Lenders will also want to know your cash flow and income, often times asking for “proof” by requesting paystubs and/or tax returns.

​Both net worth and cash flow are considered when planning for major purchases or life transitions like retirement or change in marital status.  The answers are often revealed by crunching the numbers and having meaningful discussions about purpose, priorities, and planning.  

For most of us money is a finite resource.  Having a financial fitness partner can help illustrate the connection between money and behavior as well as provide support when making decisions and choices.