Saturday, April 16, 2011

Personal, business, or government. It's all about cashflow.

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When you hear business reports in the news, you often hear about how a company has higher or lower earnings than projected. A business can operate forever so long as it earns enough money to cover expenses every month. Whatever extra money the business earns can be stashed away for rainy days or to invest in expanding the business.

People who operate their personal finances in the same way are just fine so long as their monthly income is greater than their expenses. Where businesses and people fall into trouble is when they spend more money than they earn. They are easily seduced by finance; low monthly payments can let you enjoy this product right now.

Government also depends largely on cashflow, which depends on citizen cashflow. As citizens earn more money, they pay more taxes. During the economic downturn of recent years, people have lost jobs, companies are cutting back on spending, and other things have reduced the amount of money flowing through the economy. Naturally, this means that the government has had less revenue coming into their account.

In any of these situations, having an interruption in your cashflow can be harmful to your economic situation. Generating income is vital so that you can continue paying your monthly obligations. Adding more monthly payments is a big risk because it increases the amount of income you must generate. When times are tough, you must think long and hard about taking on new payments; the item you purchase must in some way generate more income for you or save you enough to cover the cost of the monthly payment.

I've been putting money into fixing up my ugly old van. Last year, it had brake problems; I spent money replacing the entire brake system. Now, it is having fuel system problems, which we are probably going to replace too. Some in my situation would probably ditch the rust bucket and go to the nearest car lot to buy another vehicle. It is tempting. I see shiny, newer cars that would run hassle-free. But, they come with a monthly payment.

Unless I am a professional driver making money for miles put in, I can't justify taking on a new monthly payment. Vehicles are the worst kind of investment. They cost you money for gas, insurance, maintenance, and depreciation. The more you use your vehicle, the less it is worth.

My rust bucket cost me $900 cash. It is at the point where it cannot depreciate anymore. That's two expenses that I'm saving over a financed vehicle. No depreciation, no interest payments. I don't propose that everybody should drive ugly vehicles; rather, make it a point to pay cash for your vehicles.  You should own your vehicle, not the bank.

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