4 Things That Can Sap Your Cash Flow And Your Wealth

There are a number of factors that can affect your cash and wealth position.  One of the big things that can have a great impact on your cash and wealth is real estate.  Real estate can both positively and negatively affect your ability to build wealth and can be a slow grind on your finances if you are not careful.  It is your wealth that will sustain you when the economy is down and will keep growing when the economy is great.  This article explores some of the major expenses that can quickly sap your cash flow and hurt your overall wealth position.

What Is Wealth And Cash Flow

Cash flow is a term often used in real estate investor circles to describe how much money a rental building is bringing in after all expenses have been paid.  Cash flow for an individual is similar in that it is how much money are you saving at the end of the month after all bills have been paid. Wealth is the accumulation of resources including cash.  So if you do have a positive cash flow at the end of the month overtime as you accumulate that cash (whether as plain old cash, investments in stocks, bonds, real estate or something else) you build wealth.  Now keep in mind if you have more debts than you have cash or assets that does not necessarily mean you have much wealth.  The type of debt is also a big factor.  More credit card debt is not a good thing.  Debt that was used to purchase investment real estate is not a bad thing so long as the cash flow from the real estate can keep up with all the expenses.

Things That Can Destroy Your Cash Flow And Wealth

Owning More Home Than You Can Afford

While the mortgage lenders are willing to lend you a certain amount that does not mean you should necessarily be using the entire amount to purchase a home.  If you are the type of homebuyer who prefers to spend more time out going to restaurants and going on vacations, buying a home at the maximum amount you are pre-approved for can be a sure fire way to reduce your cash flow and eventually reduce your wealth.  Your mortgage payment is more than just principal and interest but also includes insurance and taxes.  If you are paying those via escrow then your overall mortgage payment will be higher than you may have anticipated.

As you pay off your home’s mortgage you are building wealth in the home itself through the form of home equity.  If you are in a house poor situation because you bought more home than you could afford then you may also be deferring maintenance on the home which means the value of your home will decrease.  The end result is that your home which is considered an asset that adds to your wealth now has lost value and you may be stuck in a proverbial trap if you can’t sell the home since the value is lower than what you owe on the mortgage.  To avoid a home and mortgage destroying your cash flow and your wealth it is best to buy a home that is affordable to you and your lifestyle.  

Credit Card Debt

If you carry any amount of credit card debt that is not paid off in full each month you are definitely eating into your monthly cash flow.  Think about it, the interest you pay on credit cards is usually within the 16% to 22% range which means on a $5000 credit card balance if you are paying the minimum per month with 18% interest rate you are paying $500 a year in interest to the credit card company.  That could have been money otherwise in your pocket rather than the credit card company.  While $500 may not seem like a lot consider that the average American has close to $17,000 in credit card debt.  That $500 dollar number will quickly grow and depending on how fast you pay off the credit card it will be much more than $500 per year being paid in interest to the credit card companies.  If you do have a credit card make it a plan to not charge on your credit card unless you absolutely have to and pay off all balances before the end of the billing cycle.  Work towards paying off all your credit card debt so that money you would have paid as interest to the credit card company stays in your pocket instead.  

Your Car

Your car is a major expense, which unless you plan on keeping for a very long time (20 or more years) and in pristine condition, that will instantly depreciate the moment you drive it off the lot.  Your car may help you get to and from work but if work in a big downtown area you will find yourself spending money for gas, maintenance and parking to get to your job.  Not to mention automobile insurance whose rates can increase based the more mileage you put on the vehicle per year.  Get into an accident or get a ticket for a moving violation and your insurance rates can go up even further.  Fancy sports cars or large SUVs will suck up more of your cash flow as well for both maintenance and gas.

Having to buy the latest and greatest car every few years or leasing a car just to get something new every few years is also a quick way to burn money on something which is only helping you get from point A to point B.  Maybe if you have a job where you need to drive clients around in a fancy vehicle it might make sense, but even older well kept vehicles show well and don’t require you to spend an arm and a leg every few years to get something new. Especially if you live in a big city and don’t really have a need for a car there are plenty of alternatives like Lyft, Uber or even Zipcar which lets you rent a car by the hour for a relatively low price and are found in many larger cities.

If your city has it taking the bus, subway or train is a great alternative to driving your car every day to and from work.  Not only do you not have to worry about driving in heavy traffic you don’t have to spend too much either while on public transportation.  Just sit back and relax and let the driver worry about traffic. While taking public transportation you can enjoy a good book, chat with your fellow bus riders, or take a nap. By not driving to work that means less mileage on your car, less money spent on gas, no money spent on parking downtown, and maybe even lower insurance rates due to putting fewer miles on your car.  In some case employers may give you money to use the local mass transit system or you may qualify for tax credits when you purchase fare to ride.  Ask your HR office if they offer any mass transit subsidies or if you have any local government tax benefits for riding the bus and put the money you save into your cash flow and into building your wealth instead.

Your Entertainment Spending

Whether you like going out to eat, going to bars to try the latest microbrew, or subscribe to the full package of cable/satellite TV and have other streaming services it all adds up in the end.  Go out to a bar with friends and the tab can rack up to $40-50 dollars per person. Multiply that times 3-4 times a week and you are looking at spending $600-800 a month on going out.  Some full cable TV packages can run in the $150-$175 dollar range.  Per year that is $1800 at a minimum being spent on many channels you probably don’t watch or even know about.

Instead of spending all that money on a cable bill cut the cord and just get the high speed internet along with some of the slim internet streamed channel packages consisting of the channels that you mainly watch.  Get a good set of rabbit ears or a good aerial antenna and tune in locally to high definition sports broadcasts available in your area.  Rather than going out to a bar 3-4 times a week invite your friends over and buy beer by the bottle or buy a growler or two and save the money you would have spent rather than going out.  Less money spent eating out and on expensive TV packages means more cash flow for you and a better ability to build up your wealth overtime. 

Bottom Line

There are many activities in life that don’t really help with your wealth and cash position but instead serve as a major sinkhole.  Getting out of a debt cycle takes a lot of effort but by trimming expenses you don’t necessarily need you can increase your wealth.  After all for many of us the last thing we want to do is be forced to work late in life since our current savings cannot really sustain our lifestyles.

Additional Resources 

• How Home Ownership Is The Key To Building Wealth by Karen Highland
• 12 Tips For Improving Your Credit Score by Kyle Hiscock
• Debt Repayment Calculator at Credit Karma  

About the author: The above article “4 Things That Can Sap Your Cash Flow And Your Wealth and How To Avoid Them” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.