In order to take control of your financial situation, you need to know what’s happening to your money. It might seem like an obvious point, but in fact many people aren’t quite sure whether their financial situation is getting better or getting worse. They simply don’t have an accurate picture of where they stand.
Trying to figure out the best way to meet your financial goals can be difficult (if not impossible) if you don’t know where you are now. One effective way of coming up with a baseline for your current financial position is to calculate your personal “cash flow.” While the term might sound a bit intimidating, particularly if you’ve never considered your cash flow before, it’s actually a fairly straightforward calculation, and an essential part of budgeting your money.
Here’s some banking advice about how to calculate cash flow.
Cash Flow Basics. Simply put, cash flow measures your total income for a specified time period (often one month), and compares that to your total expenses over that same period. If your total income exceeds your total expenses, then your cash flow is said to be “positive.” If your expenses exceed your income, then your cash flow is “negative.” A positive cash flow is a good thing because it means you aren’t living beyond your means. A negative cash flow might happen to anyone, as can be the case if you have significant unexpected expenses in a given month. The real problem with a negative cash flow is when it happens often.
Income Calculation. When you calculate the income side of the equation, make sure to include all sources of income. In addition to your salary or wages, include any bank interest and investment income, even if that other income simply stays in your savings or investment accounts. Some of those income sources might not come to you on a monthly basis (such as quarterly stock dividends or yearly mutual fund distributions), so use an average monthly amount in your calculation.
Expenses Calculation. Calculating your monthly expenses is likely to take a little more work than calculating your income. You probably know your major expenses (such as rent, car payment and student loan payments) without having to look them up. But you also need to include your utility expenses, cell phone bills, gasoline and food bills, car insurance, as well as anything else you spend money on during the month. If you do all or most of your buying with a credit card, then use your most recent credit card statement to come up with a complete list of expenses. (Or better yet, use the most recent few months’ statements and come up with an average number.)
Evaluating Your Cash Flow. Once you have the results of your cash flow calculation, it’s still worth looking at the raw data. For example, you might have a significant nonrecurring expense in the month you calculated, which can skew your account to the negative. Similarly, an unexpected windfall might make your cash flow picture look better than it actually is. Even when you have your cash flow number, make sure you understand how you got there.
One of the most dangerous factors in managing your own personal finances is ignorance. By learning more about how you make and spend money, you’ll be able to better improve your financial position. A basic cash flow analysis can be a significant part of that learning process and extremely helpful in budgeting.
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on Thursday, March 29th, 2012 at 7:41 am and is filed under Budgeting.
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In order to take control of your financial situation, you need to know what’s happening to your money. It might seem like an obvious point, but in fact many people aren’t quite sure whether their financial situation is getting better or getting worse. They simply don’t have an accurate picture of where they stand.
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