The No Debt Plan: Step Two: Achieve Free Cash Flow

by Kevin on March 20, 2008

This is the fifth post in a series: The No Debt Plan.

You just set up your budget. Let’s take a look at it. Where do you currently stand? Do you have money left at the end of the month, or are you going deeper in debt?

This concept is called free cash flow. If your cash flow at the end of the month is negative, you are just digging a deeper debt hole. If your cash flow is positive at the end of the month, then you are accumulating savings or cash. I found two business related visuals that go with this, but I don’t have the rights to them. Instead, here are links to business examples of positive cash flow and negative cash flow. And yes, you might consider running your life like a business. The concepts work exactly the same in this case.

We call it free cash flow because cash ‘flows’ from the top (income) down through expenses and hopefully into your pocket. Even $1 of positive free cash flow is something to be celebrated.

If You Have Positive Cash Flow…

Even if it only that measly little dollar, positive cash flow is where you want to be. If this is your current situation, congratulations. You are well on your way. Even if you are deep in debt, your positive cash flow can begin to chip away at the debt. For starters, you need to build up an emergency fund. We’ll talk about that next time.

Again, positive free cash flow means that you have cash left at the end of the month. You can put that cash to work in whatever way is necessary — savings, debt repayment, or investment. Strive to continue having this each month.

If You Have Negative Cash Flow…

Simply put this means you have no money left over at the end of the month, plus some additional debt. You have somehow found a way not to default on your debt, but you had to borrow more money to make it through the month.

I have some bad news for you. If you don’t do something to change the situation, you will eventually end up bankrupt. That is simply mathematical fact — after a certain period of time, you won’t be able to borrow your way out of debt. It will end somewhere.

You don’t want that. I don’t want that for you. So how do change your situation? I can’t do it for you, but here are suggestions:

  • Cut everything you are spending money on out of your life. Of course you can’t cut literally everything, but this is what psychologists tell us the average human needs: shelter, food, water. That’s it. The basic necessities.
    • Shelter doesn’t mean…
      • A $500,000 house on a $50,000 income. Sell, and rent an apartment.
      • Keeping the thermostat at 77 degrees in the winter and 65 degrees in the summer. Lower the temperature in the winter, raise it in the summer.
      • A house, apartment, or condo full of nice things. Sell your HDTV, cancel your cable.
      • Cut everything that costs you a monthly fee unless it is absolutely necessary.
    • Food doesn’t mean…
      • Filet mignon at the fancy restaurants every weekend. It doesn’t mean elaborate meals at home every week. Cut your lifestyle, eat simple. Bread, peanut butter, jelly and some fruit should work just fine.
    • Water doesn’t mean…
      • Beer, soda, or even orange juice in the fridge. Water comes from the tap, you can filter it if you must. It is extremely cheap. Don’t buy expensive bottled water, either.
  • Alternatively, you can earn more income.
    • Do anything you can to earn more money as long as it is legal. There are millions of ideas out there, so I won’t go into them here. Even if you had to bag groceries at a grocery store, or sweep floors at a factory, it is worth it. Remember, you have to get to positive free cash flow as soon as possible.

This may seem extreme, but I hope it opens your eyes. You cannot maintain negative cash flow indefinitely. It is only a matter of time before you can’t pay any of your bills. Make a change today. Get on the road to financial freedom. Cut some expenses. Get a part-time job. Get going!

{ 2 trackbacks }

Carnival of Personal Finance # 145: Baby Education Edition | Million Dollar Journey
March 24, 2008 at 7:21 am
Never Underestimate (or Overestimate) Small Savings or Income Opportunities
May 24, 2009 at 7:20 pm

{ 4 comments… read them below or add one }

Mr. Debtbeater March 20, 2008 at 7:14 am

Good points. The biggest struggle for us was to migrate from a negative cash flow to a positive one. (And we’re still barely considered in a positive cash flow at the moment.) Our next step is to get more aggressive about HOW MUCH of a positive flow we can get to help us reduce debt even faster. Living just above the line doesn’t really solve the problem, it just puts it off awhile.

Reply

JB March 20, 2008 at 7:18 am

Yes! I believe this is the MOST IMPORTANT step! You have to have a positive cash flow… no matter how you do it – second job, cut the cable, ask for a raise, decreasing spending… you have to have this! Great post.

Reply

Fiscal Musings March 20, 2008 at 12:54 pm

This is the only way to begin accumulating. It has to start with this.

Reply

Kerri October 5, 2009 at 6:28 pm

In the realm of “where do you currently stand?” there’s a new site that’s a simple step one for budgetary novices: http://www.debtspark.com. It’s basically like a spreadsheet where you can store and track very basic info that’ll give you a financial snapshot (negative or–hopefully!–positive cash flow).

Reply

Leave a Comment