Improving Your Cash Flow is the Key to Wealth
For starters, welcome to The Neighborhood Finance Guy website where we discuss financial literacy topics such as How to Grow Your Wealth, Building a Better Cash Flow Strategy, Investment, Retirement and more.
My goal is to help you make effective decisions and set S.M.A.R.T+E.R. goals with your money. As always, the information is FREE but the struggle is not sold separately.
Table of Contents
Ever Heard About Cash Flow?
The first time I ever heard of the term cash flow was in Cost Accounting class. Even then, it was kinda abstract. By definition, a cash flow statement provides data regarding all cash inflows that a company receives from its ongoing operations and external investment sources.
The cash flow statement comprises of three parts: cash made by the business through operations, investment activities, and financing activities —the sum of which is called net cash flow. The primary purpose of the statement is to provide relevant information about the company’s cash receipts and cash payments during a period.
Why is this important?
Especially in the age of fast social media influencers, this is the fine line of embellishment and fraud by omission.
If someone told you their company made over $1,000,000 in revenue, it sounds awesome. Where do you invest?!
However, that sense of awesomeness melts when you add the relevant detailed that the same company had $1,500,000 in expenses for the same period.
The Negative $500,000 cash flow is a whole other story than the million dollar revenue boast. This hold true for a lot of social media influencers. You hear about the wins but never truly see or hear about their losses. Well until they are going to jail. This impression makes you think it’s a Winning play but it might be a giant negative.
Like crypto being up 25% for the first 12 days of 2023. But it’s really down more than 51% from January 2022 through January 2023. Context is everything when it comes to wealth.
Increase Income, decrease expenses and invest the difference
While most people are content to either pursuit debt freedom or leveraging debt to earn passive income through real estate, we don’t choose. And you shouldn’t have too.
A full financial picture for your life includes increasing your income, decreasing unwarranted expenses and investing the difference to bring in more income.
My wife and I created the Net Max Financial plan to do both without missing the best of both worlds. The plan harnesses cash flow management to the fullest.
As your cash flow improves over time, you will find ways to enjoy more of the things that you want to do.
This is the secret of wealth. You end up buying back more of your own time as your investments automatically creates the income that pays for all your expenses.
Because of our efforts, our net worth added nearly $100k in 2022. While debt freedom can provide a psychological euphoria, it falls short of building real wealth. Real estate investing or building a business are both great ways of bringing in passive income, you end up owing so much in debt that one bad year can tank your progress.
My wife and I are on our way to becoming millionaires by 2025, all due to being cash flow efficient. Our monthly (net) average was a positive $1,394 which totaled over $100,000. That’s a lot of retained future investment potential.
Average Monthly Cash Flow From 2017-2022
| Year | Avg. Monthly Income | Avg. Monthly Expenses | Avg. Monthly Cash Flow | Change From Prior Year |
| 2017 | $5,823 | -$5,573 | +$250 | N/A |
| 2018 | $7,655 | -$7,223 | +$432 | +73% |
| *2019 | $8,286 | -$8,062 | +$224 | -48% |
| **2020 | $12,763 | -$10,658 | +$2,105 | +840% |
| ***2021 | $14,115 | -$10,829 | +$3,286 | +56% |
| ***2022 | $15,253 | -$13,187 | +$2,066 | -37% |
| Avg. 5 | $10,649 | -$9,255 | +$1,394 |
**Married – Financially More Efficient and COVID-19 Pandemic
***Extra Passive Income from Temp. Consulting or Advising Short Gigs
Work SMART+ER, Wealth Using Cash Flow Management
A properly breakdown of cash flow is knowing where your income is coming from. Most people don’t really know how much they make on a gross level. Even worse, they are unaware of the amount net of tax. This creates two problems.
You might be taking home too much money which leads to more spending. This leads to paying too much taxes. Why is that?
Well if you aren’t taking advantage of your 401k, 403b, or 457b at work; you might be missing out of nearly $2,700-$5,400 in tax deferment benefits.
On top of the historical average growth of 8% (excluding your matching contributions), you are playing the game backwards.
A maximum contribution of $1,875 per month (in 2023 IRS contribution limits) for 30 years at 8% is worth $2,641,032. Beyond your contributions, the interest gained is nearly $2M. This is a tradeoff of $675,000 for an additional $2M.
Even after 20% flat tax, you would still have over $2M to retire comfortably domestically, or in luxury overseas.
Financial Plan that Works
This is why I strongly believe that with the Net Max Financial plan, Americans can cut down the amount of year required to work and become millionaires in less than 20 years. Turns out, we are doing it in less than 10 years.
As bold as that sounds, understanding how money works can help you generate more wealth than your 9-5 ever could. It’s all about working smarter and not harder. Even if some doors close, just focus on the doors that you can open.
At every stage of life, you need to bring in more income. See Cash Flow – Income Breakdown
With expenses slated to increase by 30% in 2040, the struggle season is just beginning if people stay under prepared. The next part is to move away from unnecessary expenses.
This is the long term wealth approach. While it might be nice to live in the city or the hot spot, it is also very expensive. On top of the extra lifestyle expenses such as meal deliveries, entertainment and etc. You don’t just live in the city, you have to pay to live there.
Even with two mortgages, our average monthly expenses are under $10,000 since January 2017. See Cash Flow – Expenses Breakdown
(Net) Total Cash Flow over the Past 5-yrs
If you are ever racking your head thinking about how it’s all possible, all I can say is that it takes time. This is not an overnight deal. Making money is more or less the easier part. Holding yourself accountable and keep expenses lower is way more valuable.
Cash Flow management is to key that helped us create wealth in a shorter amount of time. While 2020 and 2021 were outlier years in terms of us making more income, the average of $1,250 per month makes a huge impact.
The true key to wealth is the difference, the Net.
What you do with the difference will be up to you. You can make more income with it and spend it with or for love ones. The end goal is to buy back your own time and live a more purposeful life.
| Year | Total After-Tax Income + PI | Total Expenses | (Net) Cash Flow | Change From Prior Year |
| 2017 | $69,876 | -$66,876 | +$3,000 | N/A |
| 2018 | $91,860 | -$86,676 | +$5,184 | +73% |
| *2019 | $99,432 | -$96,744 | +$2,688 | -48% |
| **2020 | $153,156 | -$127,896 | +$25,260 | +840% |
| ***2021 | $169,380 | -$129,948 | +$39,432 | +56% |
| ***2022 | $183,036 | -$158,244 | +$24,792 | -37% |
| Avg. 5 | $127,790 | -$111,064 | +$100,356 |
**Married – Financially More Efficient and COVID-19 Pandemic
***Extra Passive Income from Temp. Consulting or Advising Short Gigs
If you need more information how to process cash flow, check out the video below.
Disclosure:
This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T.+E.R. decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 5.2022. We operate independently.
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