Before I can really talk about managing your free cash flow, you’ve got to know what it is and how you can acquire some. Wikipedia defines free cash flow as:

cash flow available for distribution among all the security holders of a company.

As I’ve talked about before, if you view your personal finances as a business, you’re the sole shareholder of your “company”. Therefore all of the free cash flow belongs to you.

Essentially, it is the money that is available to you from your income after you’ve paid all necessary expenses. If you’re budget is constantly tight, you’re not going to have much cash flow to manage and you’ll need to come up with ways to increase your free cash flow. This can be accomplished in one of two ways: by increasing your income or reducing your expenses. It sounds simple enough, but coming up with specific action plans for this can sometimes be difficult.

I’d also like to mention that I’ve seen far too many people concentrate solely on reducing their expenses. While this is good to do, it leaves out the other side of the equation which would help speed you on your way to your ultimate financial goals. Don’t forget to also spend some time trying to increase your income as you also focus on reducing your expenses.

Once you have managed to free up some cash flow, you’re going to need to know what you ought to do with it. This is where so many people get in trouble because their are so many choices and everyone is vying for a piece of what you’ve got. I break down all of these choices into four basic categories to simplify things:

• Pay down debt
• Save
• Invest
• Spend

These aren’t in any particular order, but I wouldn’t put Spend near the top of the list, although that’s what most people do with it. You’ll have to decide what is best for your personal situation to do with the money that’s available to you. Establishing an emergency fund may be high on the priority list for some, while others may look to invest because they’ve already got an emergency fund. You may choose to allocate your funds equally among all of the categories so that you’re making headway on all fronts. Whatever you do though, make sure that it’s a conscious decision with your goals in mind.

If it helps you, try to think of your finances like a business (like I mentioned earlier). By doing this you’ll want to increase and manage your free cash flow so that it provides the most growth and benefit to your overall finances. So take some time to figure out what your current cash flow looks like and how you can increase it so you can allocate it how you best see fit.

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