In “Net Worth”, we reviewed a snapshot of our financial situation. I want to remind you that for data from this snapshot to mean anything, we need to take those snapshots periodically along the road. However, now it is time to talk about our financial journey, which is dynamic, not static, and our work in progress. Our financial journey is reflected in our Cash Flow Statement.
While in the Net Worth Statement, we compared our assets to our liabilities, in Cash Flow Statement, we will compare our income to our expenses. Income means everything that brings us money: our salary, business income, dividends, interest, and capital gains from our investment portfolio, rental income, tips for those who get them, social security or insurance payouts and so on. Expenses mean anything that we pay money for to somebody else. It can be rent, mortgage, property taxes, regular taxes on personal or business income, groceries, transportation, utilities and bills, gym membership, subscription services and so on.
To grow our net worth, we need to have a positive cash flow. If we are looking for ways to have or improve existing positive cash flow, we need to increase our income, decrease our expenses, or both. I will talk more about ways how to grow income in future articles. However, right now I want to focus on reducing our living expenses.
There are two types of expenses: fixed and variable. These types of expenses exist in both our personal and business finance.
Fixed expenses mean that they are “fixed”, that they “do not change over time”. I put “do not change over time” in quotation marks because over time they can increase or decrease not because you do something to change them, but because product or service provider made that change. Examples of fixed expenses are our rent or mortgage, utility bills for water, natural gas, hydro, electricity, home internet, cable, cell phone plan, insurance premiums, gym membership or subscription service and so on.
Variable expenses do change over time. These are usually our expenses for groceries, transportation, healthcare, clothes, entertainment, take out and so on. We don’t pay the same amount for groceries every month, even though we may spend comparable amounts of money.
If you want to decrease expenses, it’s easier to change variable expenses first. You can track your expenses monthly, determine the “black holes” when you spend money on something you don’t need or can easily go without, eliminate or decrease these expenses, and redirect the money that you didn’t spend to something useful, something that aligns with your financial and life goals.
We can also change our fixed expenses, but changing them usually takes time and is done through lifestyle changes. Also, often, we can make a bigger impact on our cash flow when we change fixed expenses. Let’s say you decide that your housing expenses are too high, and you need to cut down on them. You can move to a new place. If you are renting, you will need to give the landlord advanced notice. Usually, it’s 60 to 90 days, but you should check your rental agreement to be sure. If you own a place and let’s say you live in a house, you can sell it and buy a condo, or you could even just rent a condo or an apartment for a while. If you have a mortgage, you can do more or less the same thing, but when you sell your property, you will need to use the proceeds to pay your mortgage balance. Alternatively, you can talk to your financial advisor and see if you can move your mortgage to a new place, which is an option if you live in Canada.
Looking for ways to decrease expenses is not easy, but in the long run, it will be very beneficial for our financial well-being.