My Financial knowledge is by no means elite, but the growth I have experienced over the past 3-5 years is tremendous. Even with an engineering degree from a prestigious school, I still was a financial novice (regardless of what I thought of myself at the time).

Since graduating in 2019, I have gained various life experiences that have aided my financial knowledge, in much greater steps than any engineering class could have provided. My journey started off by paying off student loans, read A Ton of Bricks (FP, pt.1) if you want to hear more about how that store begins. Following our journey to financial peace, I dove deep into the world of investing which is where I discovered Rule #1 Investing, a methodology hosted by Phil Town, but based off the principals taught by Warren Buffett and Charlie Munger. While learning more about Rule #1, I also began to do more research about what it meant to save, and how to better utilize a budget, besides tracking monthly transactions. This is the point I tied it all together.

I discovered that there were three main use cases for money. You can…

  • spend it
  • save it
  • invest it

This is probably obvious to you, but for me at the time, I was just trying to do what was right in order to be as financially happy as I could now and later on in life. After defining these three avenues for income to travel down, I asked myself….what is the key to growing a desired category. The answer was cash flow.

Cash flow is a term that I had learned throughout my investing research. I’m sure if you are well versed in the language of financial statements, earnings calls, and letter to to shareholders than you have probably heard this term before. For those who the term is new to, think of cash flow as how much money got added to your bank account at the end of the month if you didn’t send if off to other financial assets like savings accounts or investments). If you take your monthly income and subtract your monthly expenses in general that is your cash flow. Obviously this is more complex when it comes to a public company, but for simplicity’s sake, those are good assumptions to make. Cash flow made sense to me when it came to researching a business, but as I began to think about my personal life as a business, and how cash flow affected the amount of money that I could pour into my money avenues I was floored. This put terminology behind why we were so motivated to pay off our debt. This is why investing now is so important, and for most this is why saving is hard.

Having a high cash flow protects you from risk. I personally am not a very risky person, if my plan A has small chance of failing, I ensure that there is a plan B that has almost no risk of failing. There are two methods you can do to increase cash flow, either increase income, or lower expenses. Most peoples plan A is to increase income. They look for that next job with a pay raise, take on extra shifts, or accept extra clients to drive cash flow up. I tend to think the opposite way. My worst case scenario is that my income drops, and what can I do to maintain a safe level of cash flow even if catastrophe happens. The steps I take to accomplish this are paying off debts, minimize subscription services, and do not let treats become a normal.

The two biggest steps I take are definitely the most important. If you have debt, you are constantly using your cash flow now to pay for something you bought earlier in life. This works out if you income stays the same or rises, but if catastrophe strikes, not only do you have to pay for the necessities now, but also for earlier purchases.

Subscription services are one that I more recently discovered are an easy way to eat away at cash flow. I’ll be the first to say, that I love a good subscription service. I have many that I enjoy, but I think in order for business to maintain a steady level of cash flow the are putting the weight on their consumers to pay on a regular basis, which is allowing them to take risks. In other words, companies are shifting the risk of their company onto the consumers debt, rather than their own. I think subscription services can be a dangerous game to play, especially when they are established for long periods of time. I have much more to say about the worries of this cultural trend, but for now I will leave it with this question: Be weary of what you sign up for, is your enjoyment of that subscription close to the costs you are paying for it that aren’t the listed monthly price?

Cash Flow is key, and if you look in the public market the companies that maintain a strong cash flow tend to do well over time. I myself would like to do well overtime, so focusing on Cash Flow, and the ways to protect and maintain it seems like a pretty good idea to me.