Understanding cash flow is essential for anyone aiming to achieve financial freedom through effective budgeting techniques, such as the envelope-based system. Cash flow refers to the movement of money into and out of your financial accounts over a specific
period. It encompasses all income sources, such as salaries, bonuses, and investments, as well as all expenses, including fixed costs like rent and variable costs like groceries. By grasping how cash flow works, individuals can gain insight into their financial habits and
make informed decisions regarding their spending and saving. One of the key components of cash flow is the distinction between positive and negative cash flow. Positive cash flow occurs when income exceeds expenses, allowing individuals to save, invest, or pay down debt. Conversely, negative cash flow happens when expenses surpass income, which can lead to financial stress and reliance on credit. Understanding these two states is crucial for anyone using an envelope-based budgeting system. This method encourages users to allocate specific amounts of cash to various spending categories, helping to prevent overspending and ensuring that all expenses are covered within the limits of their income.