Healthy Finances Starts with Knowing Your Cash Flow.
By Alex Casella
Cash flow is not complicated. It’s the movement of money in and out of household, or business finances, which measures net income. Net income is simply income minus expenses over a set period, typically that period is a month. If the concept is so simple, why do so many struggle to know what their cash flow is?
Knowing where hard-earned money is going each month is very important and can determine how much someone can afford, save, or pay extra toward debts.
However, many individuals these days say they’re living paycheck to paycheck. They can’t figure out how to get ahead with savings or lowering debt. Yet, they’re not too sure where their money is going each month and often find out the hard way after going through a cash flow activity.
The goal of cash flow is to achieve what’s known as Positive Cash Flow each month. Meaning, once you’re done paying all your bills, there’s extra money left over. With positive cash flow you’ll be able to save more consistently, make extra payments toward loans, and start leading a healthy financial lifestyle.
It all starts with knowing where your paycheck is going. Here are some tips to help you get there:
Whether you use a budgeting app, mobile banking, or some type of spreadsheet to go through your expenses each month, consider building this monthly activity into your lifestyle. Pick the same day each month, the first Friday of the month for example. Sit down and review your accounts. Understand where money was spent and if you’ve overspent in any categories such as retail shopping or eating out.
What are you willing sacrifice to improve your financial health and reach positive cash flow?
These days, the urge and impulse to spend is constantly in our face. Large retailers learn our algorithms and tell us to buy items. They text us, email us, or tell us on social media when something is going sale. It’s on us to fight the urge and develop self-discipline to forego the wants, and rather focus on the needs. Start questioning purchases and determine if the purchase is a necessity or a desire. Start looking at those emotions and feelings you have around money. Ask yourself, “Do I need this, or do I want this?”
While establishing a method for tracking finances you need to develop rules. For instance, one rule is the Pay Yourself First Method where you direct the first monthly payment to yourself into a savings account, creating a forced-savings. Another rule is the 50/30/20 Rule which establishes allocating 50% of income toward needs, 30% toward wants and 20% toward savings and extra debt payments. Other types of rules you can set are strategies such as Spend Limits, or specific Allowances which provides parameters that control the amounts to spend.
Positive cash flow is the place to get to. It takes time, commitment, and dedication to improve cash flow. Don’t expect cash flow to improve over night or be a smooth ride. It may very well be bumpy so give yourself time, and don’t give up when you hit an occasional bump in the road.