How to Use Cash Flow to Plan for the Future

Written by , February 4, 2013

How to Use Cash Flow to Plan for the FutureCash flow analysis is an underutilized but extremely important element of personal financial planning. In its most basic form, cash flow is a measure of an individual’s total income versus their total expenses over a certain period of time. By incorporating a number of different financial measures into a single number, cash flow can help an individual plan for their future.

If a consumer never calculated cash flow before, they shouldn’t spend countless hours making sure every last cent for every account is in their budget. The point of a cash flow analysis is simply to gain an understanding of how overall income compares to expenses. This cash flow analysis is central to planning for a successful financial future.

  • Use Cash Flow to Judge Financial Health. We often tend to focus on the wrong things when we evaluate our financial health. Or, more accurately, we only tend to focus on part of the equation. For example, there’s a tendency to focus too much on what our income is, and not focus enough on what our expenses are. Cash flow takes both of these into account, and it’s easy to see at a glance if we’re moving in the right direction. An individual’s financial health is likely to be good when cash flow is positive, while a negative cash flow is likely indicative of poor financial health. Knowing where an individual stands now can help one plan for the future.
  • Use Cash Flow to Evaluate Your Lifestyle. A quick look at your cash flow numbers for the past six or twelve months can provide you with valuable insight on whether your lifestyle is financially sustainable. For example, if your cash flow numbers are always negative, it means that you’re living beyond your means, and need to lower your expenses, try to increase your income, or both.
  • Use Cash Flow to Determine How to Invest. The better your cash flow numbers, the more risk you may be willing to take in your investments, because a positive cash flow means that you have a financial cushion going forward, based on your income.
  • Use Reasonable Cash Flow Measures. When you’re trying to plan your financial future based on your cash flow, it’s important not to evaluate it over too short or too long of a time period. You might find it to be less burdensome to measure your cash flow only once a year, but if you do so then you won’t be able to make adjustments or identify problem areas as you go. On the other hand, if you try to measure your cash flow every week or every day then you’re likely to come up with numbers that seem to go up and down so quickly that it’s impossible to do any planning based on those numbers.
  • Calculating Cash Flow. Click here to get advice on how to calculate cash flow.
  • Like any other personal financial analysis you do, the data from a cash flow analysis is only helpful if you act upon it. Use the advice above so that you can use your cash flow number to help you plan your financial future.

    Tags: , , ,

    • Twitter
    • Facebook
    • Digg
    • Delicious
    • Reddit
    • Stumble
    • Design Float
    • LinkedIn
    • MySpace
    Subscribe   Share/Bookmark