When I coach people in the area of their finances, I like to use the image of a water tank. Water comes in at the top and out at the bottom. The water level in the tank signifies cash in the bank. Positive cash flow means that the water level is rising: there is more coming in than going out. Negative cash flow means the water level is falling: more water is leaving than is coming in.
When we are having challenges, we need to figure out to how to decrease expenses or increase income. (It’s also a good idea to see if you have any leaks and, if so, patch them.) We must either decrease the water going out or increase the water coming in, or the tank will run dry.
One good strategy is to identify when to set an alarm. When the tank gets to a certain low level, a cautionary alarm should go off– for example, when you only have two or three months’ money in reserve. An alarm should go off at that point, indicating that action is needed — cut back on unnecessary expenses.
If the level continues to go down, then a second serious alarm should go off when the tank is nearly empty (one month’s reserve). This is crisis mode. When you’re in crisis mode, you need to embrace extreme measures. You can only spend this month what came in the previous month.
As long as you only spend next month what came in last month, you’ll never go broke. As long as you are taking in more than you are spending, you’ll always have reserves. This is the clarity demonstrated by the water tank.