Even if you spend a lot of time managing your personal finances, you probably don’t think of your income and spending in terms of cash flow. If they use the term at all, most people think that cash flow is something that businesses have to worry about. But you also have a cash flow, and figuring out whether it’s positive or negative is an important part of managing your money.
Cash flow planning is the foundation of all Financial Planning, because it allows you to:
- Assess your ability to meet your goals.
- Project your future cash flow needs.
- Identify opportunities to increase income and/or decrease expenditures.
- Make portfolio adjustments to meet your investment objectives with less risk.
To properly manage your personal finances you should understand the basics of cash flow and its importance in supporting your budget. Simply put, cash flow is the flow of cash in and out of your accounts. Cash inflows include salary and other sources of cash-based income. Cash outflows include bill payments, including mortgage or rent, living expenses, utilities, and repayment of debt. You can be considered to be properly managing your personal cash flow if you never bounce a check and rarely, if ever, have to take out a loan or use a credit card to make ends meet.
To get started, you will need to prepare an accurate account of your monthly income and expenses. When you deposit your paycheck, money is coming in; when you buy something, it’s going out. The difference between the two determines whether you have a positive or negative cash flow. For example, if over a year you bring in $50,000 in earnings and pay out $40,000 in expenses, you have a positive cash flow of $10,000. But if you spend $52,000, your cash flow is negative $2,000 and needs attention.
Having a positive cash flow means you can pay your bills on time and cover any other immediate expenses. Even more important to your future financial security, having a positive cash flow means you’ll be able to save for long-term goals like a comfortable retirement, a down payment on a home or a college education.
If your expenses are more than your income, you should create a budget to cut back on your variable expenses. Remember, the key is to always spend less than you earn. If you can’t find ways to cut expenses, then you’ll need to step back and really evaluate what you currently view as “necessities.” They may be luxuries in disguise that you can live without.
Being aware of cash flow and taking the actions of forecasting your daily cash available and building a buffer fund to support your checking account will help you significantly. These actions will protect your budget and will give you time to proactively respond to money problems before they hit your accounts - keeping them out of the red and yourself relaxed.
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