This critical formula can transform your personal finances for the better — and it’s simple to calculate. Here’s how to use it for riches in 2025

The cash flow formula explained

If you’re unfamiliar with the cash flow formula, take heart. It’s more commonly applied to businesses, but you can also apply it to your personal finances. Melissa Houston, a CPA who covers women in business issues for Forbes, explains it this way: “Cash flow is the lifeblood of a business. It's the stream of money coming in and going out that keeps operations running, pays bills and helps a company to grow.”

It’s pretty straightforward: You can create wealth by treating your finances like you’re running a company. Now, let’s break down the main components of the cash flow formula:

• Income. Your income is the money you bring in through work, investments, pensions, side hustles, etc. The ability to grow your income is important, but it’s not the only thing you should focus on.

• Expenses. Expenses eat away at your income, and while some — like rent, clothing and transportation — are unavoidable, excessive spending on things like fancy toys or dining out are not.

• Debt. As it pertains to the cash flow formula, debt can become a problem if you are spending too much money covering the interest on credit cards or making large car loan payments. But not all debt is created equal. There is such a thing as good and bad debt (a mortgage on your home versus high-interest credit cards).

• Cash flow. Your cash flow is the money left over after you’ve covered all your expenses, including your debt payments. You have more money to save and invest if your cash flow is high. While you can invest in stocks, bonds and exchange-traded funds (ETFs), you can also make capital improvements to your property, such as a home renovation that drives up its value.

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Accumulating more money: The formula applied in 2025

Here are three cash-flow strategies businesses use that you can easily adopt to your own finances in 2025.

Prioritize adding income over cutting expenses

This does not mean you should ignore expenses, especially the wasteful ones. And thankfully, nearly a third of Canadians are already planning to cut back on spending in 2025, according to a BMO survey.

That being said, there’s a limit to how much you can cut. There are fewer limits on your ability to earn income.

Eliminate bad and expensive debt

Here, credit card debt remains the chief culprit when it comes to bad debt.The average credit card balance for Canadians was $4,499 in the second quarter of 2024, according to TransUnion.

And, the Bank of Canada also says close to half of Canadians with a credit card carry a balance for at least two consecutive months.

Converting to a lower interest personal loan can free up cash through a monthly payment that ensures you are paying down your debt.

Use good debt to your advantage

While this can be risky for a novice investor, especially if you lack discipline, increased cash flow leaves room to take on good debt by purchasing real estate. For example, if you purchase a rental property, you can use the rent you collect to pay the mortgage while owning an appreciating asset.

Chatting with a financial advisor or real estate professional before attempting this is best. But increased cash flow sets the stage for effectively managing your debt — and maybe the occasional indulgence.

Sources

1. LinkedIn: Melissa Houston, CPA

2. Forbes: The Crucial Role Cash Flow Plays In Business Success (Feb 2024)

3. BMO: BMO Survey: One-Third of Canadians Expect to Curtail their Spending in 2025 (Dec 17, 2024)

4. TransUnion: Q2 2024 Credit Industry Insights

5. Bank of Canada: The reliance of Canadians on credit card debt as a predictor of financial stress (July 2024)