Your cash flow is simply is the ratio of money you bring in (your income) to the money you spend (your expenses) over a fixed period of time. Most people calculate their cash flow by the month because many household expenses are paid on a monthly basis. Knowing and monitoring your cash flow can be a powerful tool to determine where you stand financially.
To calculate your cash flow, you simply compare all of your regular cash inflow (income) against your regular cash outflow (expenses). It is essential to only take into account your regular income and expenses, as “skewing” the numbers by taking one time receipts or expenses into account only cheats yourself.
For most people, their primary income is from their job, but if you receive regular payments from other sources, such as annuities, rents, of government benefits, these too should be included. Your expenses do not just include your basics like housing costs, transportation costs, utilities and the like, but should also include regular discretionary expenses as well. If you take your family out for a big dinner every week, this is a regular expense although it may be completely voluntary.
Once you subtract your monthly cash outflow from your monthly cash inflow, you have a basic assessment of your cash flow situation. If it is negative, it means that every month you are spending more than you are making and probably living beyond your means.
People with a negative cash flow usually make up the difference through borrowing, either taking out non-revolving loans from banks or using their credit cards. If your cash flow is positive, it means that you are living within your means. The larger your positive balance is each month, the more financially secure you are.
Although this is an extremely simple and almost “common sense” device for seeing where you stand financially, many people still do not go to the trouble. This is in large part due to the fact that most people have a basic understanding of their situation anyway, they know if they are living within their means or not, so working out the exact cash flow seems unnecessary.
However, looking at the actual numbers and thinking about them gives you a much stronger sense of exactly where you stand and what response – if any – is appropriate. After looking at the solid numbers, you may decide that some discretionary expenses may not be a good idea any longer, or you may learn that you are actually doing much better than you thought and it is time for a better investment strategy for your discretionary funds.
This is the most basic way of determining your cash flow position. Keep in mind that regardless of whether you are doing well or not, you should not only calculate your cash flow position, but should monitor it regularly taking into account increases and decreases of both income and expenses. This same data can be used to create more complex metrics that provide a more detailed analysis of your position.
Vincent Polisi is the founder of Credit Repair College and Finance the Dream. Their video training is designed to allow consumers to take control of their financial future by learning the insider secrets of credit repair. For more information on
bad credit repair, please visit them on the web. Finance the Dream helps people looking for a
rent to own homes take advantage of the $8,000 tax credit.
