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You've estimated and determined your cash flow--now what? Cash flows can be kind of exciting. Those lists of itemized spending and percentages of total spending are the key to accumulating wealth and fulfilling your financial goals.

The Latté Factor

Little purchases--coffee, cigarettes, CDs, magazines, and so on--can make the difference between accumulating wealth and living paycheck to paycheck. The latté factor is the ability for these small daily expenditures--if invested in tax-deferred retirement accounts--can amount to millions of dollars.

For example, say you're 23 and don't believe that on your paycheck you can save any more money. But consider $5 a day spent on a latté and biscotti.

Over one year, $5 a day is nearly $2,000. Put into a retirement account, it is reasonable to expect that this annual investment could grow to $2,000,000 by the time you reach the age of 65.

Using Your Cash Flow Statements

Before determining your actual cash flow, make an estimate of your cash flow using the same form. Comparing your estimated cash flow to your actual cash flow can reveal eye-opening spending habits. For example, the average household spends more per month going out to eat than it does on groceries. Click here to calculate your actual cash flow.

Once you've determined your actual cash flow, the ground is prepared for you to take concrete financial action towards your goals. Contrary to common perception, financial health and security can become a reality even with a very modest income.

To accumulate wealth, what really matters is having a positive cash flow. The reason why many people, especially people with high incomes, live paycheck to paycheck is that they spend more than they make on things they don't need.


Reducing Your Spending

The key to making your cash flow positive is to reduce your spending. Another way is to make more cash, but since most people have more control over what they spend than how much they earn, managing spending is usually the best place to start creating a positive cash flow.

The 3 exercises that follow will help you reduce your spending, which ultimately will help you take advantage of the latté factor.

Helpful Tips:

Write down each expenditure. Doing this for 7 days to determine how much you really spend often reduces spending automatically. People become more aware of what they are buying and reexamine whether or not is something they really need or want.

Only pay cash. When we buy things with a credit card or check, we don't feel the cost as clearly as we do when we pull out crisp, hard-earned $20 bills. Some people reduce their spending by as much as 20% simply by paying cash.

Never spend more than $100 without taking 48 hours to think about it. The $100 ceiling is arbitrary--pick whatever level is right for you--but the point is to reduce impulse buys. Stores are designed to inspire impulse purchases. By forcing yourself into a "cooling off" period, the excitement of the moment may wear off.


How much will all those additional savings be worth if you invest them? Use MsMoney.com's Value of Additional Savings Tool, to see what these additional savings could be worth to you.

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