| Real Life Strategies for Building Wealth
Your Game Plan to Financial Independence

Your Game Plan to Financial Independence

Editor’s note: This is a guest post from Pauline of InvestmentZen.com. The point Pauline makes here is simple: to achieve financial independence you need to master three things: spending less, earning more and investing wisely the rest.

Financial independence is the stage of your financial journey where your passive income from investments covers all your living expenses. That means you never have to work another day in your life if you don’t want to. Pretty sweet, right? But that sweet reward comes after a few years of saving and dedication that not everyone is able to accomplish.

Know where you stand

When you embark on a journey towards financial independence and early retirement, you need to review your entire finances to know where you stand.

  • If you have high interest debt, paying it off is your number one priority. Try to get a 0% balance transfer or at least refinance for a cheaper rate, so it doesn’t take forever.
  • Then look for a refinance of your student loans and mortgage, that can also save you thousands
  • Send every extra cent you have to pay off your debt.

Once your high interest debt is wiped off, time to plan for financial independence.

Your financial independence number

How much do you need to live comfortably for the rest of your life? Right now, there are expenses that are related to work, like buying suits, commuting or having lunch with your colleagues, that will be eliminated once you are financially independent. If your income is lower once you stop working, you might also be paying less taxes. And if you are living off your nest egg, you will not be making retirement contributions anymore.

On the other hand, as you get older, you might need a bigger house for your growing family, money to send your kids to college, and medical care in old age. The last thing you want is having to go back to work at age 65 because you didn’t plan properly!

So, determine your financial independence annual budget, and multiply that by 25. Using a safe withdrawal rate of 4%, your nest egg should outlive you if you have 25 years of expenses saved.

Get started

Financial independence is achieved by a combination of

  • Spending less
  • Earning more
  • Investing and compounding

Spending less

Spending less is easy when you know the reward that is expecting you: independence from a cubicle and freedom to do what you please with your days, decades before your peers. But if it becomes a frustration, you might give up and go back to your old spending ways. Try to determine what is really important to you, so that doesn’t happen. If you want to buy something, wonder how long you would have to pay for it, and whether it is worth delaying financial independence by that much.

Earning more

Earning more is the real key to financial independence. While you can certainly cut your expenses here and there, you still need to eat and put a roof over your head. You can’t achieve a 100% saving rate. In order to become financially independent earlier, you need to make more.

You can start by asking for a raise at your current job, if you haven’t had one in a while. A one time $10,000 raise means $200,000 more over the next 20 years! If you were already able to live off your current salary, invest 100% of your raise for a year or two. Living on last year’s salary is a great way to boost your saving rate. If your boss won’t give you a raise, look for a better paying job elsewhere. Or a job that pays the same but would give you more free time, less commuting expenses, etc. Try to find an hour or two in the evening to work on a side project. It could be something that pays you right now, like teaching a yoga class or dog walking, or a side business you enjoy, so it doesn’t feel like work and might provide an additional source of income in retirement.


Finally, investing is the secret that will take your financial independence plan to the next level. It will take much, much longer to save 25 years of expenses if you are getting 1% interest from your saving account, compared to getting 8% from the markets. 8% is a realistic rate of return over a long period of time (30+ years) for index funds like the S&P500. Open a brokerage account and start sending every amount you can spare, taking first advantage of tax free accounts and your company match for an extra boost. No need to be an expert in investing or spend hours researching a company, just select a few low fee index funds and keep going. Ignore the market crashes, the craze about this or that stock, do your boring little thing and watch your nest egg grow. Invest only money you can afford to leave untouched until financial independence. Reinvest the dividends and watch compound interest work its magic.

You can also look for other types of investments, like real estate, but remember that managing a rental property is not exactly what you call passive income, so take that into account when you picture your retirement. Will you be active, and willing to do that? Will you even be around, or traveling the world? Will a manager still make the investment worth your while?

Financial independence does not happen overnight. But following these steps, even on an average salary, you can get there in just a few years. If you save 50% of your income, which is easy with a partner since many households make it work on one income, financial independence is just 17 years away.

What is your game plan?

photo credit: Lapse of the Shutter Tree Avenue via photopin (license)

Make Your Dream Family Vacation a Reality Without Breaking the Bank

Make Your Dream Family Vacation a Reality Without Breaking the Bank

With the cost of vacations constantly rising, it can be difficult to know how you’ll be able to take the entire family away during the summer months. But thankfully, there are a number of ways you can start saving up points so you can enjoy the vacation of a lifetime and without breaking the bank.

Below you’ll find some top tips on how you can earn points through your credit card company, how you can earn air miles and where you can stay in hotels for free (yes, free!):

Before You Start, You Need to Plan Your Trip

As soon as you start looking at all of the available plans there are, it’s easy to get carried away and you may soon feel overwhelmed by the choices there are available. That’s why it’s important that you’ve decided exactly where you want to go before you start shopping around for the best reward schemes.

The points available with each credit card and holiday provider will differ dramatically depending on where you’re going. So, before you start planning, make sure you discuss with the family what your top destinations are. This will enable you to narrow down your search results so you can carefully filter through the available options without getting too distracted by other exotic locations!

Opt for Convertible Reward Schemes

Some credit card programs will only provide you with one reward program, so try to find one that’s convertible and offers you more than one scheme. A lot of leading credit card companies like AMEX offer a number of different programs (learn how to redeem AMEX points for maximum value here) which will give you much more scope when planning future vacations as well as this one.

And don’t forget to get your partner to sign up to these schemes too. You’re both entitled to them!

Pay for your Bills with Your Rewards Card

To rack up those points as quickly as possible, it’s a good idea to set up an autopay system with your credit card for all of your bills. Those bills that come out of your account once a month, e.g. cable, cell phone and electric, can all be set up to automatically come out of your credit card account. A lot of companies will let you do this without charging you any additional fees so it’s a great way of earning points without having to think too much about it. And if your bills amount to $2,000 a month, you’ll have earned enough to get a trip within the US with the points you’ve built up as many cards offer you a point per dollar spent.

Check Out Hotel Loyalty Programs

You may be thinking you’ll have to find budget accommodation in order to take your family to their dream location but think again. A lot of top hotels offer great rewards programs which allow you to cut the costs of your stay dramatically. Some hotels will offer you these schemes on their own but it’s much easier to build up points if you’ve got the rewards card that they’re co-branded with.

For example, you can join the Starwood Preferred Guest program which is in conjunction with American Express. This helps you to get fabulous overnight stays in these hotels with your points, and could even see you upgrading to a prestigious suite without it costing you a dollar!

Go Steady with Your Rewards

As mentioned previously, it can be easy to get carried away with all of the points on offer but this could land you in a whole heap of trouble if you’re not careful. A lot of these rewards come from credit cards and if you go too mad spending on these pieces of plastic, you could end up with a mounting debt that you can’t handle. So, be sensible when you’re using your cards, opting for one or two to start with before you add more, if necessary.

And finally, do your research before you spend your points so you know you’re getting the best value for them. Even though you may be able to travel somewhere with the air miles you’ve accumulated, your points may be worth more if you hold onto them for next year’s trip. Equally, don’t just hold onto your rewards “just in case” because they may start to lose value, expire, roll over with changing schemes and so on.

With a little careful planning and research, you and your family could be enjoying the ultimate trip at a fraction of the price!

Editor’s note: Aimee Archer took a round the world trip when she was 18, and since then has always loved the thrill of travel. Now a Mom, she enjoys planning trips for her family; broadening the kids minds as they discover new cultures and strengthening her relationship with her husband.

photo credit: JLS Photography – Alaska Enjoying the winter sun . . via photopin (license)

7 Powerful Money Rules You Usually Ignore

7 Powerful Money Rules You Usually Ignore

money rules

If I ask you to tell me three money rules fast which ones are they going to be?

[Take a minute to think about it and let me know in the comments.]

The ones I’d most likely think about are:

  • Spend less than you make.
  • Stash the difference away.
  • Don’t simply save it, invest it wisely.

That’s it! Three money rules to rule them all!

Or maybe not.

These money rules are important but today I’ll share with you 7 money rules that are powerful enough to transform you money destiny. And to top it all, these are money rules that you don’t hear much about and usually don’t think about or remember.

(Before I go any further, I’d like to thank Quora member Lukas Schwekendiek who reminded me about some of these.)

So, the 7 powerful money rules you don’t usually think about despite them having the potential to transform your personal finances are:

#1. Money spent living better is not wasted

You see, most personal finance experts would tell you that paying attention to your wants rather than needs and allowing yourself some luxury is a waste of money.

Living in a nice apartment?

Waste of money paying all this rent/mortgage when you can save it.

Travelling business class?

Waste of money when you can travel coach and save the difference.

Guess what?

Living better, makes you feel better, perform better and brings great returns.

I have introduced a rule that if my flight is longer than four-five hours I travel business (and it matters little whether I travel for my job, my side hustle or pleasure). This pays for itself manifold given that I save at least couple of days recovery time (my time is very expensive), can work during the flight and am less likely to die from deep vein thrombosis.

It is up to you to figure out what ‘living better’ means to you (and for you).

#2. Produce more instead of saving more

Regular readers of The Money Principle know that this is part of my ‘money philosophy’.

There is little wrong with living a parsimonious life style (said simply this means getting most bang for your buck). Still, producing more, and correspondingly, making more money is the secret to winning the game of wealth.

In many cases this is a matter of shifting your mind set from the one of a consumer to one of producer. Simply put, this means a shift from reading book to writing book, from playing games to developing games etc.

#3. Get excited, not afraid, about your money

I ignored this one for close to two decades.

All this brought was a financial crisis which I was determined enough to turn into rebirth. It could have easily been a disaster ending in a bankruptcy court.

Combat fear and turn it into an excitement that will bring about financial success irrespective where your finances stand at the moment.

(Just in case you started suspecting that I’ve gone all new age on you, this is about much more than a positive thinking. This is about framing problems, about the buzz that solving problems and winning give, and about turning misery into enjoyable games. Hard but so worth it.)

#4. You always buy emotions not things

I’ve never been able to understand people who shop for pleasure and remodel their kitchens every ten minutes or so.

Now, having done some research and thinking about it, I do. It is not about the kitchen or about the objects people buy. It is about the emotions this creates.

Buying stuff make people feel powerful, secure and prosperous. Spending is shapes their identity (I’m prosperous and certainly much better than…) and feeds their self-esteem.

Ones you remember that you don’t buy things but emotions, you may start thinking about different ways to achieve the same emotion. Ways that are not going to break the bank and fill your house with clutter.

#5. Decide what matters and spare no expense

When we were in a lot of debt and I kept track of every penny that came in and out of our bank account, there were three things on which I continued spending despite the expense.

  • I bought expensive perfume (I love Bulgari) because its smell makes me feel like million dollars (and then some).
  • Continues having expensive haircuts.
  • Maintained my gym membership and worked with a personal trainer.

These kept me out of psychological meltdown and helped me get out of debt very quickly.

Meanwhile, I clamped down on almost everything else. I cancelled my car parking permit and cycled to work; I stood at the bottom of a ski slope (we borrowed a friend’s house to go skiing) and bought people’s ski passes; I didn’t buy any clothes and shoes (bought clothes and shoes only for my growing up son); etc.

You see what I mean?

Decide what is really important for you and don’t skimp on it. Don’t forget to cut all that doesn’t matter much.

#6. Get help when you need it

To master your finances you have to learn and act. You also have to be able to know when you need help and who you can ask for it.

That is all.

#7. Focus on value not money

This is a mistake that we make in our personal finance and our businesses. Large organisations make this mistake as well and they fail.

What is the mistake, you may ask?

We focus too much on money: we focus on the money we don’t have and we’d like to make. Meanwhile we completely ignore the fact that money follows value.

Which means that if we focus on the value we can contribute (and crack it), the money will follow anyway.

Next time you think about ways to make money, think about what you can contribute to someone’s life that makes their life easier, more enjoyable and more productive.

(As a side line, focusing on value is a very good way to make the difference between internet articles that really offer ideas on how to make more money and ones that only tell you to sell your stuff.)


Personal finance is not simply and only about spending less than you make, saving and investing. There are powerful money rules that the most successful players of the Game of Wealth know, and apply, and most people ignore.

Can you think of more powerful money rules that are usually ignored?

Kick Your Heels Up and Save Money on Holiday

Kick Your Heels Up and Save Money on Holiday

save money on holiday

Are you sitting somewhere in the sun, sipping ice-cold beer and racking your brains about ways to save money on holiday?

I am. We arrived on Skiathos and started our holiday last Friday. We are not what you’d call extravagant and still the money is flowing through my purse like a mountain river: fast.

So, I’ve started thinking about how to spend less without threatening the quality of our holiday.

You know me, guys, I consider being frugal only when it is frugal artistry and it doesn’t compromise quality.

Before I tell you what I came up with (and keep your excitement in check here) let me mention that if you are British – or you earn wage in Britain in GBP – being frugal matters little. Whatever you do, you holiday will cost you more than last year. Why?

This is part of the price we Brits have to pay for our democratic choice to leave the EU – a much weaker currency. Just so you know that I’ve checked, exactly a year ago one GBP would have got you 1.42 euro; today, one GBP would buy you 1.15 euro.

Yes, your beer costs approximately 20% more before you even start being frugal. This is true about everything you pay for: food, entertainment, car rental…all of it.

Now that this is out of the way and we all understand that it doesn’t matter how careful we are with out money we’d spend 20% more than we planned to spend, let me tell you my to four tips to save money on holiday.

I’m assuming that you have already booked flight and accommodation and your main spending is on food, booze, transport and fun.

#1. Save Money on Holiday: Food

It didn’t take long to figure out that our main spending here is on food. We all have to eat, right?

We need our protein and we have a son in his teens with us – it takes quite a bit of food to keep him full and happy.

The only way to eat well and to save on food is to go for a combination between cooking simple things and eating in restaurants.

You want an example?

Tonight we have steak and tomato salad that cost 12 euro for the three of us. In a restaurant the same meal would have cost no less than 60-70 euro.

We are not losing out on the local cuisine: we’ve decided to go to restaurants twice a week (and just so you know, I have a Greek cookbook and John claims that many of the dishes he tries in the local restaurants have nothing on mine).

I reckon that this strategy – a mixture between cooking simple and nutritious food and going to restaurants – will save us close to 600 euro over the two weeks.

Not too shabby, I think.

#2. Save Money on Holiday: Booze

This is a tricky one. Again, you’d do best to buy your booze in the nearest supermarket.

What is the fun in drinking it alone, on the balcony (or in your room)?

I don’t do that. I have a drink at the bar; I have one drink per evening (this suits me right since I’m a cheap drunk anyway).

If you want to save on drink, you should also stay away from cocktails – these are delicious but very expensive and full of sugar.

#3. Save Money on Holiday: Transport

save money on holiday

We didn’t hire a car on holiday twice in two decades and we regretted it: having the means to get about gives you a lot of freedom and has great effect on how much you pay on fun and entertainment.

We like to explore when we go places. This is why we hire a car.

This year we hired our car before we left the UK; this way, we saved in the region of £400 pounds for two weeks hire.

As you can see, we ended up with the most ugly car I’ve ever been in; it is also severely underpowered. Still, we can go to the supermarket and to different beaches.

I’ve always fancied hiring a motorbike but John is not that keen; may be I’ll do this when I get my licence.

#4. Save Money on Holiday: Fun and Entertainment

save money on holiday

Do you know the best part about being on a Greek island?

Fun is everywhere and it doesn’t have to cost much.

This island has many beaches – we have a list of the ones we would be visiting again.

I’ll be walking the dogs in the dog shelter again (man, this is a hard one – my heart broke last year and I wanted to take them all back).

The rest needs to be planned – having fun is great when it is planned.

John and our son want to go on a daylong yacht experience – not cheap but good father-son fun and bonding. (I’m not going because a day on a boat is my idea of hell).

Our son would probably do some water skiing and diving.

And of course we will have a lot of fun playing in the sea.


Once you’ve accepted that your holiday expenses would be approximately 20% higher than this time last year – because of the weak pound – there are still easy ways to save money on holiday.

You just need to use a bit of planning and imagination; that’s all.

Knowing Your Net Worth is More Important Than Knowing the Net Worth of Floyd Mayweather

Knowing Your Net Worth is More Important Than Knowing the Net Worth of Floyd Mayweather

net worth

Do you know how much is your net worth at this very moment?

You don’t? And do you know that approximately 20,000 people per month search to learn how much Floyd Mayweather is worth?

Crazy, uh? If you are one of the people who don’t know how much you are worth but are intimate with the wealth of celebrities, you should stop it right now. You should focus on yourself!

Saying that, I was a bit like that myself; except that I didn’t care much about other people’s wealth either. As you well know this disregard for money only led to a lot of debt and heartbreak. In fact, it pretty nearly brought John and me to a complete personal disaster.

You see, here is the deal: if you want to achieve financial health, you really need to get this one right. You have to make sure that your net worth is increasingly positive; you also have to make sure that your wealth is appropriately structured. (And if you are wondering what this is about, I’d like to remind you that when we had £100,000 consumer debt, we also had rather high net wealth. We were just ‘cash poor’; or if you prefer, our wealth didn’t have enough liquidity.)

Since I’ve made it my mission to help as many of my readers as possible to achieve financial health (once you become financially healthy, wealth will follow naturally) today I’ll tell you most that there is to know about knowing your net worth. Including what it is, why knowing it is more important than knowing the worth of Floyd Mayweather, what tools you can use to track it and why you shouldn’t let it define you.

What is net worth?

Your net worth, also known as net wealth, is the total amount of your assets (and possessions) minus your liabilities.

When the value of your assets and possessions is higher than your liabilities, your net worth is positive; and this is very good news, indeed. The more positive your net worth is the more choices you have in your life.

Oh, and remember how I told you that your cash flow is the most important number in personal finance? You can add your net worth as a very close second.

5 reasons knowing your net worth can change your life

“Why is knowing my net worth so important?” – you may be thinking.

One thing is sure: it is important not because knowing may allow you to brag (nicely, of course) or because you could compare yourself to others and fit neatly in clichés. Like ‘I am part of the 10%’ kind of clichés.

No. Knowing your net worth, will serve you well because of the following:

#1. You may be more wealthy than you thought; or not

Whatever you think about your position on the board of the ‘game of wealth’ you are probably wrong. You can trust me on this one. Or we can experiment together.

Let me ask you this: do you see yourself as ‘broke’ or ‘wealthy’? It is important to answer honestly and to write your answer down. You’ll have to get back to this one when you’ve calculated your net worth.

When I did this one for the first time, it turned out that I was way out of step. Because we had a lot of consumer debt, I had grown to see myself (us) as ‘broke’. When I calculated our net worth I had to admit with astonishment that we are ‘wealthy’. I’ve never forgotten this.

The knowledge that we are actually rather wealthy completely changed the way in which I think, behave and make decisions. It was a good surprise.

You may be spot on. Than use the knowledge to change or improve your situation.

#2. You could really plan your life

Ignorance is never a goof foundation for planning. This includes ignorance about your net worth since this is what provides the knowledge (and confidence) to plan for the next week, next month, next year or retirement.

Need an example? Here it is.

I bet you’d choose not to buy a gadget you’d enjoy for couple of weeks if you can see how this money would increase your net worth; with projections.

I bet you’d use your monthly cash flow differently is you know by how much this will increase your net worth when invested properly.

And I’d bet that knowing where you are in the game of wealth would transform the way you do things.

So do me a favour and try this one:

  • Write down where you think you are in terms of wealth.
  • Calculate your net worth using one of the tools I’ll tell you about in the next part of this post.
  • Compare the two.

Now you can either start working towards some really big dreams – like becoming financially independent in X years – or change the course of your finances. It is your call.

#3. Helps you ‘keep your eye on the ball’

Probably better say that knowing, and following regularly, your net worth will help you keep your eye on your money and your life dreams. Long term.

#4. You can take the long view

Knowing your net worth is the only way to be able to make long term life and finances decisions.

Want an example?

I’ve been wondering whether it would be possible in principle to give up work next month. Call me weird but it makes me feel better when I know that I have a choice.

Now, you can decide whether you can afford to go on a holiday using your monthly cash flow. Problem is that here we are talking about a very long vacation.

Then I came across question response by Doug Massey on Quora where he told about the F.T.I. coefficient (F*ck That Index) he developed to make fast decisions about whether or not he could retire. It is simple and you can calculated like this:

(your age x you net worth) / your annual expenses

You see; you need to know your net worth, not simply the size of your pension fund. (Oh, and if the coefficient is over 1,000 one can ‘retire’.)

I did the calculation and you know what?

I can leave my job tomorrow if I want to. Feels good to know. On the other hand, if my coefficient was lower than 1,000 I would have started looking at my net worth, thinking of ways to increase it or change its structure; or reduce my annual expenses. Whatever.

#5. You’ll feel more financially secure

Knowing and following regularly, your net worth also increases the level of control you have over your long-term finances (and life).

And high level of control usually makes us feel more secure in life and finances.

Best tools to track your net worth

You can go all ‘professional’ and use one of the really sophisticated tools like Personal Capital or YNAB. Problem is that these work best for people in the US (particularly Personal Capital).

Or you can use some of the free (and fairly basic) tools like the CNN Money one. (Yes, these are mostly in $$$s and are not very versatile).

There are also some interesting apps that can do that; just have a look and test them.

I still prefer good old-fashioned spread sheets to the more fancy tools and apps – it does the job, usually is free and is versatile enough to allow you to change it to reflect your life.

Here is a selection of the spread sheets that my blogging friends use and I believe are versatile enough to be immensely useful.

  • Sexy Net Worth Tool: Yep, you guessed it. This is the link to the tool that my friend J$ from Budgets are Sexy uses to track his net worth. And he has been doing this for eight years now.
  • Personal Balance Sheet (Net Worth Calculator): This net worth calculator is used and offered by Todd from the Financial Mentor. I like this one a lot because of its clean designs and nuanced approach.
  • Net Worth Calculator (Budget Breakaway): Finally a net worth calculator that has pound rather than dollars in it (not that it matters that much; it is all money, after all). What concerns me with this one are some of the assumptions and the confusion between ‘assets’ and ‘possessions’ (example: the house you live in is not strictly speaking an asset).
  • The Money Principle Net Worth Calculator: This is the net worth calculator we developed and use to follow our net worth. It is fairly detailed and assumes a difference between ‘non-income generating possessions’, like you house and your cars, ‘assets’, ‘cash and savings’ and ‘retirement assets’. This matters when you assess the structure of your wealth. TMP Net Worth Calculator also allows you to include, or not, the value of your life insurance in the calculation.

Now it’s your turn to choose one of these calculators. Please make sure that you choose not the one you think you’ll fill in fastest but the one that allows you most opportunities for wealth building decisions.

To make these decisions, you need to be able to answer the following questions:

  • How much am I worth?
  • What is the constitution of my wealth (including: liquidity, possessions, income generating assets etc.)?
  • How can I mobilise my wealth better to generate the regular income I need?

Words of caution…

Finally, I’d like to offer the following words of caution.

Don’t be duped by the size of your net worth

Where net worth is concerned, the saying ‘the bigger the better’ fully applies. Still, it is possible to have a very decent, even large, net worth and be in financial trouble. I know; this is what happened to us. To make sure this never happens, I had to completely change the structure of our wealth. Analyse your net worth carefully and watch for the following:

  • Proportion of net worth that is liquid and easily accessible. What proportion of your wealth to keep liquid changes with age but you cannot afford to be ‘cash poor’ at any stage of life.
  • Proportion of your wealth in non-income generating possessions. You need to live somewhere and you need to get around; true. But at any stage of life you have to make sure that the wealth you have tied up in non-income generation possessions is no more than half of your total net worth.
  • The other half of your wealth ought to be invested in income generation assets. If you don’t at least aim to achieve this, you are missing a trick and, as much as I hate to say it, deserve all the financial problems you are going to hit.
  • Remember that you can always transform a ‘non income generating’ possession into an asset. Example: if you rent out a room in your house, you’ve done it. Now, invest the rent and you are on your way to prosperity.

For building true wealth you need to continuously increase your net worth and check it’s structured for optimal growth.

Your net worth is not your self worth

You may be thinking that this is a cop out in case you found that your net worth is very low or even negative.

It isn’t.

My net worth is very positive and I’ll never allow it to define me. In fact, my self worth is what defines my net worth.

Or as Macklemore said:

“Make money, don’t let money make you.”

That is it!

Now, go and calculate your net worth! Analyse its structure and come back to tell us what did it tell you about your life and your finances.

photo credit: Colorful Stones Texture – HDR via photopin (license)

4 Simple Ways to Stop Being Financial Failure: it is in your monthly cash flow

4 Simple Ways to Stop Being Financial Failure: it is in your monthly cash flow

monthly cash flow

Do you know what the only number I need to be able to tell you whether you are financial failure or prosperity superstar is?

No, I don’t want to know how much you earn: I know too many people who earn over £100,000 and have twice as much consumer debt.

No, I don’t want to know how much your car costs. Every day I pass a tiny house with a Porsche parked in front.

You can tell me about the food in the best restaurants in town and this will be little help: I see too many people pay on their credit cards and then I hear that they forget about it for twenty years. Or until they can’t make the debt payment any longer.

Tell me your monthly cash flow and I can tell you whether you have finacial helath, and whether your future looks like lush farmland or like a parched wasteland.

Let me ask you this:

  • Do you know what cash flow is?
  • Do you know what your cash flow is up to the nearest ten pounds (dollars)?
  • Is your cash flow positive?

If you answered ‘no’ to any of these questions keep reading. You don’t have to stay financial failure, you know. I used to be like you: I had no idea how much I earned, had even less knowledge of how much I spent and my cash flow was so negative that it will make your ever moaning aunty look like a beacon of positivity.

I know what it feels like to be financial failure; to be in a situation where it matters little what you do – you keep getting deeper into debt and despair. I also know that you can change all that and in this post will tell you how to become a prosperity superstar.

If you are already prosperity superstar you can stop reading now. Go do something else and join us again for the next building block of sustainable wealth.

Monthly cash flow: the basics

What is monthly cash flow?

Your monthly cash flow is the difference between your monthly income and your monthly spending.

Simple, right?

Well, as with many other thing, the Devil is in the detail.

How to work your cash flow out?

To calculate your cash flow you need to account for all your income and all your expenses.

Many people, and you may be one of those, have only one source of income: employment or pension/social security. This makes your job easier when calculating your income. A word of warning, though: over the last couple of months two of my colleagues thought that they earn quite a bit less than they did. Do yourself a favour and check exactly how much you (and your partner) earn.

You may have more sources of income like investment dividend, rent, second job or a side hustle. (You know that very wealthy people have on average seven income streams, right.) Make sure that you include all your income sources. When income is variable (for instance, you are self-employed and your income fluctuates) it is wise to go for low average.

If you thought that figuring out your income is a bit tricky, getting to grips with your spending will seem like black magic.

One way to tackle your spending is to allocate it to three different groups:

Fixed expenditure: these are the bills that you have to pay (never mind what) and are difficult to change very fast. These include your mortgage, any municipal taxes, utility bills and all loans repayments.

Changeable expenditure: this is the monthly spending that you can change though in some cases there may be penalties. Here I would include house and car insurance (you can renegotiate those), life, health and dental insurance, landline and mobile phones and internet.

Variable expenditure: this is the monthly spending that you can change very quickly; almost one day to the next. This includes all food, drinks, transport, entertainment, fitness, beauty and grooming, and services. This is the most versatile part of your spending.

To know your ‘fixed’ and ‘changeable’ spending you’ll need to look at old financial statements and current bills.

To figure out your current variable spending you’ll need to either go through your bank and credit card statements (in great details) or keep a spending diary for couple of months. This is a very useful blog post on keeping a spending diary. Or there is also this one – take your pick.

There are also easy to use personal finance apps, like the Spending Tracker, which will help you record your spending on the go. Just remember to record everything. And I mean absolutely everything.

Looks like a great bother but it will pay for itself very quickly.

I’d do, and have done, both – after all even small mistakes in calculating your spending can result in large delusions when you are making decision about your cash flow. Delusions can be endearing in love (for some time, at least) but in personal finance they keep you where you are: a financial failure.

What tools to use?

You can go high tech and choose apps like Pocket Expense Personal Finance, or even YouNeedABudget.com (YNAB).

Thing is, the apps and budgeting tools on the market often emphasise the saving and frugality side of budgeting.

And you, my dear reader, know that we at The Money Principle attach equal importance to saving and frugality (becoming a frugal artist), and developing the skills, competencies and mentality for increasing income. Naturally, I believe that to become a prosperity super star you need to be able to keep an open mind and tackle both your spending habits and your capacity to make more money.

This is why, I use a simple and efficient spread sheet we developed. It allows you to record your income and spending very easily and calculates your monthly cash flow; when you have been using the tool for some time updated the recorded information every month it also calculates your annual cash flow, and your annual income and expenditure by category. This is a screen shot of part of The Money Principle Monthly Budgeting Tool:

monthly cash flow

Cash flow profiles

After you’ve worked out your monthly cash flow (and made sure that this cash flow is regular and not only a one off) you’d be able to place yourself in one of these three personal finance profiles.

Cash Flow Profile 1: ‘Debt Profile’

The ‘Debt Profile’ and looks like this (the green line is your income and the red line your expenditure):

monthly cash flow

According to this profile, your income is stable (or decreasing) and your spending is increasing.

Your cash flow in this personal finance profile is negative; what is worse, most people who are in the ‘debt profile’ have increasingly negative cash flow. As a result they have to juggle a number of credit cards and loans to cover their monthly spending and their financial obligations.

Simply put, if you find yourself in this profile you should sit up and pay attention: you are likely in a lot of debt and getting even deeper into debt.

Cash Flow Profile 2: ‘Survival Profile’

The ‘Survival Profile’ of personal finance looks like this.

monthly cash flow

It means that your income and your spending are in equilibrium: neither of them is increasing (or decreasing) and your cash flow is positive and constant.

This is the profile of a classic ‘saver’ on a regular income. When you are in the ‘survival profile’ of personal finance you can meet your da-to-day financial obligations but little more. You are also likely to have some money saved for the future but even a relatively small live event – like the need to make an emergency trip or renew the plumbing in your house – will reduce (deplete) your savings and set you back.

This profile allows you to live the life you live but is unlikely to allow you to expand it. You’d need to work until late in life and your retirement provisions may need another look.

Cash Flow Profile 3: ‘Prosperity Profile’

The ‘Prosperity Profile’ is the one where your income is increasing while your spending is kept constant (or is increasing at a much slower rate than the increase in income).

monthly cash flow

This profile is where you need to be if you wish to build sustainable wealth for the future.

To stop being a financial failure and become a prosperity superstar, you need to move from the ‘debt profile’ to the ‘prosperity profile’ of personal finance. This can be achieve by making sure that your monthly cash flow is positive (in the first instance); once this has been achieve you need to find ways to increase your monthly cash flow.

Here are the four steps to take you to prosperity super stardom.

Four steps to prosperity super stardom

#1. Step One: work out your cash flow

Yes, there is no two ways about it: if you are to be a prosperity superstar, you need to work out your monthly cash flow. Please scroll back to the beginning of these post and use the tools mentioned there (use the ones that you feel comfortable with).

Just do it!

#2. Step Two: follow your cash flow monthly

Get into the habit of following your cash flow monthly. This way, you will always know where you stand and what do you need to do about it.

Feeling secure about your money, is to a large degree about developing the habits that make sure that you are in control. Slip on some of these habits – including following your cash flow monthly – and you’d soon find that you are no longer in control of your money but that money controls you.

#3. Step Three: Stabilise your spending

What you do for this step depends on the personal finance profile that your current situation most resembles.

If you are in the ‘debt profile’ you may need to look very carefully at your spending and cut it down mercilessly. Please, do not panic, though: this is not forever and it’s likely that you’ll need to cut out of your life most of the pleasurable things in life only for a short while until your finances stabilise.

Your first goal will be to make sure that your spending is not higher than your income; after that you can gradually cut a bit more so that you achieve a small positive cash flow.

There are many budgeting tool you can use to get your spending under control. My problem with what is generally on the market is that it teaching you how to refuse yourself rather than how to stop wanting.

When we started turning our monthly cash flow around so that we could pay off our rather large debt, I developed and used an exercise aiming to help me control what I want. Not lusting after things makes it so much easier not to waste your money buying stuff.

I also developed a budgeting system known as the ERR strategy for money management. ERR is for ‘Eliminate’ waste, ‘Replace’ by changing what you do and how you do things and ‘Reduce’ your consumption. This money management strategy helped me save over £15,000 per year and took me couple of hours to implement.

If you are in the ‘survival profile’, you can look at your spending but it’s likely that this is under control; so focus on expanding your earning potential and on making more money instead.

#4. Step Four: Increase your income

One debate in personal finance is as old as personal finance itself: the debate between the proponents of cutting expenses and frugality, and the defenders of earning more and extending your income.

Quite clearly, to become a prosperity super star you should become a master of both. But don’t believe any one who tells you that mastering frugality is better than learning how to make more money: this strategy has one main fault in that how much you can save from your current income is always limited by the need to sustain your life (even a very frugal one).

You should also be aware that it is always much better to save half of a very large income than to save half of a small, or even average, income.

I’m assuming that you are sold on this one and you’ll be diverting at least some of your energy towards increasing your capacity to make more money and developing diverse income streams.

There are many epic blog posts offering ideas for making extra money. I’d have a look at Ramit Sethi’s ultimate guide to make money on the side. If you want some very specific ideas that will make you between £300 and £1,000 per month you can check our post on fifteen ideas to fill in your fridge and fifteen ideas to pay your monthly bills.

These are the things to remember when you set out to increase your monthly income.

There are four principal income strategies:

  • Sell your time (labour);
  • Sell your reputation (this increases what you charge for your time many-fold);
  • Build a business; and
  • Investing

There are three winning formulae for successful business ideas:

  • Businesses that turn rubbish into value. These are the kind of businesses where you get paid at both ends; for example, offer a service collecting garden rubbish and make bio-fuel.
  • Businesses that offer the conditions for success in another area. Example here is academic publishing.
  • Businesses that ride on a dream. The possibilities here are almost without limit including: slimming clubs, fitness centres, fashion, massage and beauty etc.

Last but not least, if you want to learn about increasing your income, and what this takes, you should listen to some of the top rappers. My absolute favourites are:

  • ‘The greats are great because they pain a lot.’ (Macklemore) and
  • ‘Scared money don’t make no money.’ (Young Jeezy)

Okay, I’m making light here. I know that increasing your income is not a joking matter and that it takes time, planning, action, change of thinking and a lot of courage.

I know this because we did it – in five years we increased our annual income by 45%.

And you know what? If a couple of middle-aged dreamers can do it, you can do it too!


If I have to tell you in one sentence what this blog post is about, this is it:

“What matters is how much money you keep, not how much you make.”

To become prosperity super star you need to do only one thing: make sure your monthly cash flow is positive, that it continues to be positive and it is increasingly positive.

Check your cash flow now! Is it positive? Write down ten ways to increase your positive cash flow. (And please do share at least one of these.)

photo credit: Passion Falls – HDR via photopin (license)