Cash flow is the most important barometer for determining the health of your household’s finances.

Positive cash flow is the foundation for saving, investing, and building your household’s wealth. Therefore, becoming financially excellent requires positive cash flow, and by extension, a thorough understanding of your monthly income and expenses.

Conversely, just about everything bad that happens to a household’s financial condition begins with negative cash flow.  Sometimes this occurs due to circumstances beyond the household’s control, such as a job loss, overwhelming medical expenses, divorce, disability, or death.

More commonly, however, negative cash flow occurs slowly and compounds over time due to a household ‘living beyond their means.’

Their spending must be funded somehow, leading to excessive, expensive credit card debt, drained savings and investments, sold assets, and dropped insurance coverage.  This creates a powerful, downward-spinning vortex of negative financial and life consequences.

Here’s a list of actions you can take to ensure positive cash flow:

• Create a monthly household expense budget and stick to it.
• Use credit cards for convenience purposes only and pay off outstanding balances every month.
• Keep an up-to-date register of bank transactions and reconcile your bank account(s) at least monthly.
• Create a monthly financial report, subtracting credit card balances from bank account balances to determine your ‘net cash’ position.  A falling net cash position indicates negative cash flow and should be addressed immediately.

Many of the unexpected circumstances leading to a household’s negative cash flow and subsequent financial crisis are caused by events representing risks that can be mitigated, reducing the adverse financial impact on the household.

An effective household risk management program includes the following components.

1. Identify potential negative scenarios
   • Extraordinary expenses due to a severe illness or injury to any household member.
   • Loss of income due to unemployment or long-term disability of a household member.
   • Large, unexpected expenses due to damage or destruction of your home, auto or other property.
   • Loss of income and/or increased expenses due to the premature death of a household member.
2. Measure the financial impact of the negative scenarios
3. Assess the potential frequency of their occurrence
4. Analyze the negative scenarios to determine the risks requiring the most attention and resources
5. Select the appropriate risk management approach
   1. Risk avoidance is the easiest and least expensive way to manage a negative scenario. This means choosing to avoid activities or situations that create high risk. Examples: Quit smoking, heavy drinking, or illegal drug use.
   2. Risk reduction involves minimizing the impact of negative scenarios if they occur. Examples: Maintaining an emergency savings account, backing up computer systems to alternative locations, installing safety features in your home or automobile, or building and staying connected to a network of business
      and industry professionals (critical if you become unemployed).
   3. Risk retention is making a conscious decision to do nothing about an identified, potential negative scenario.This is appropriate for small or low-impact risks. People who are aware of potential negative scenarios and do nothing
      are also retaining risk. They’re ‘playing the odds,’ which could be financially disastrous if the negative scenario occurs.
   4. Risk transfer is mitigating risks by purchasing an insurance policy. This is possible because the insurance company is able to take advantage of the law of large numbers. That is, if many households purchase insurance against a risk, they become a ‘risk pool.’ The occurrence of the risky event among those in the risk pool can be predicted, and the cost of settlement is effectively shared through the premiums paid by all members of the risk pool.

Because they plan and think ahead about money, financially excellent households prioritize setting money aside to achieve their financial goals.  They also understand that financial goals have a variety of timelines, each carrying different requirements.

Therefore, they segregate their savings and investment accounts into theoretical ‘buckets’ based on the timing of their financial goals.

The investment vehicles used and the investment allocation selected in each bucket should be based on the account holder(s) need for liquidity, tax status, and risk tolerance.

The following is an example of how a traditional household (married with young children) would use this bucket concept:

• Short-Term Bucket (Zero to 3-Year Time Horizon) – Highly liquid (Emergency Savings, Short-Term Spending Needs)
• Intermediate-Term Bucket (3 to 5-Year Time Horizon) – Moderately liquid (Housing Upgrade, Private School, Intermediate-Term Spending Goals)
• Long-Term Bucket (5-Years to Age 59½) – Low liquidity (College Funding, Early Retirement, Vacation Home, Long-Term Spending Goals)
• Retirement Bucket (Beyond Age 59½) – Low liquidity
• Legacy Bucket (Beyond Their Lifetimes, for Future Generations) – Zero liquidity

Financially excellent households invest in non-financial assets to build their net worth.  These assets are purchased for capital appreciation and/or income-generation purposes.  

This asset category excludes depreciating assets primarily used for personal pleasure and consumption, such as automobiles, boats, airplanes, and other recreational vehicles.  

Their most common, and often largest, non-financial asset is their primary residence.  

Other common capital appreciating and/or income-generating assets include: 

• Residential or commercial real estate investment property
• Second homes or vacation properties 
• Starting a business
• Private debt or equity in someone else’s business
• Undeveloped land
• Fine art

The biggest downside of the non-financial assets described above is their illiquidity.  Unlike traditional financial assets, the equity built up in a non-financial asset cannot be quickly converted into cash.  

Therefore, it’s generally a good idea to fill up your short- and intermediate-term financial investment buckets before making a major investment in a non-financial asset.

Incurring debt shouldn’t be avoided or feared, but it should be used intentionally, with a defined purpose and an absolute ability to service the debt.

The most common, purposeful use of debt is a mortgage loan for your primary residence.  Incurring mortgage debt makes buying a home affordable, and the monthly payments provide the buyer with an opportunity to build equity in an asset rather than being a pure expense (as in rent payments).

With proper financial analysis, using debt as leverage to purchase a productive non-financial asset can create excellent opportunities for capital appreciation and/or income-generation.

Two grey areas for incurring debt are vehicle loans and student loans.  Planning ahead and saving to purchase a vehicle or pay cash for college are the optimal strategies.  

However, these are big, and increasingly necessary, one-time expenses that often require payment with borrowed funds. 

Vehicles

Vehicle purchases are essentially lifestyle decisions.  People pay extra for the intangible status benefits beyond their basic transportation needs.  If they can afford to include a permanent transportation expense line in their household cash budget, then it doesn’t really matter if they lease their vehicle or take out a loan.  

If they’re going to replace their vehicle every three years, they’re probably better off leasing than buying.

A purposeful use of a vehicle loan is to pay it off, on-time, over five years, then drive the vehicle (for free) for three to five more years.  Of course, this is also a lifestyle decision.

Student Loans

Ideally, student loans are incurred to get a degree and gain employment with enough income to pay the loan off over its ten-year term.  However, there’s no assurance that sequence of events will occur.  

Many students never complete their college degree programs or are unable to get a good job after graduating.  As of April 2025, nearly one-third of all student loan borrowers were over 90 days past due.

If a household has student loan debt remaining from the parents’ college days, protect your credit rating by continuing to pay it off.  If parental student loans are expected to be used to fund their children’s college expenses, incorporate the loan repayment into your cash flow forecast.

Credit Cards

Credit cards should be used only for convenience and transactional simplicity, with their balances paid off every month.

Revolving credit card debt and home equity loan balances are the result of negative household cash flow.  Their existence contributes to a downward spiral of finances and life.