Evaluating Cash Flow

Add up your monthly obligations, average expenses, and discretionary expenditures. Subtract this figure from your monthly net income to determine your leftover cash supply. If the result is a negative cash flow, that is, if you spend more than you earn, it could mean serious trouble. Review your expenses to see what you could reduce or eliminate.

A professional financial counselor might be able to help you with these calculations. Before starting to invest, your spending must be less than your earnings--with some to spare.

If the result is a positive cash flow, but your spending nearly equals your earnings, it might be too soon to start investing right now, outside of your employer's retirement program. Most people have more control over their expenses than their income, so taking a look at which expenses you could eliminate or reduce is a good first step. Maybe some of your discretionary expenses are luxuries that you could give up. Perhaps a debt refinancing or consolidation could reduce your monthly payments. A financial professional may be able to help you with these matters.

If the result is a positive cash flow with plenty of money to cover entertainment (restaurants, movies, even video rental) and incidental expenses (pocket money for postage stamps, a newspaper, and such), it may be time for you to embark on an investment plan. But there are still a few more things to consider.

Ideally, the money you use for investing should be free of other obligations. If you are "supplementing" your income by adding to your credit card debt, the money you have left over at the end of the month isn't truly left over. Therefore, it would be prudent to pay off your credit card debt before embarking on an investment plan. Do you know it will take 11 years and an additional $1,934 in interest to pay off a credit balance of $2,000 at 18.5 annual interest rate, provided you make no new purchases, and pay only the minimum payment (about $35) each month? If you can't pay off credit card debt immediately, work out a structured plan to pay off the balance as quickly as possible. However, the monthly payment that you're making needs to be included when you calculate your monthly expenses.