Positive Cash Flow

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Positive Cash Flow

A positive cash flow margin is absolutely essential if you are to accomplish either long-term or short-term financial goals. Without a cash flow margin, you cannot accumulate in order to meet long-term goals. In addition, each of the four other short-term goals - tax reduction, increased giving, debt reuction, and increased living expense - can only be met by having a positive cash flow.

In order to reduce taxes, either additional expenditures must be made for such things as increased giving, IRA's, tax sheltered investments, and the like, or income must be reduced. Either increased deductible expenses or reduced income will result in tax reduction. However, both require that there be a positive cash flow to begin the process.

Without a positive cash flow, increased giving is not an option. Once there is a positive cash flow, however, and it is used to increase giving, that decision results in decreased taxes because charitable contributions are deductible. There are many people who plan all of their tax reduction through giving. However, they had to have a cash flow margin to begin the process.

Obviously, if you want to reduce your debt principle payments, you must have the excess cash to do so. If you are "going in the hole" by overspending, then there is no way to get out of debt until you generate a positive cash flow. After debt retirement that extra amount can be used to reduce debt further, which in turn increases the cash flow.

Conclusion

Lastly, if a couple or individual has as a short-term goal to increase the level of their lifestyle through a new home purchase, a new car purchase, vacations, additional gifting at Christmas, or eating out more often, they must have a positive cash flow to have the additional funds.

Today's Bottom Line

Living expenses and debt go hand in hand. Typically, debt is used to fund living expenses and, conversely, without the ability to borrow, the ability to increase the lifestyle is not there.