Calculating your cash flow is quite easy. You simply take your regular monthly income and subtract your regular monthly expenses. With this same information, you can calculate your inflow to outflow ratio. This is a more complicated financial metric that you can use to get a clearer idea of your financial situation.
To get this ratio, you take your regular monthly inflow and divide it by your regular monthly outflow. The precise number given provides you with a better guide for what actions may be appropriate. As an example, if your total monthly income from all regular sources is $5,000 per month and your total monthly expenses (including regular but voluntary expenses) is $4,000 per month; your Inflow to Outflow ratio is 1.25. On the other hand, if your monthly income is $5,000 but your monthly expenses are $6,000 then you have a ratio of 0.83, meaning you are spending more than you should be. Having a ratio of 1.2 or higher is ideal and the higher it is, the better off you are. This metric can be broken down as follows:
0.8 and Below- A ratio at this level means you are living well beyond your means and already experiencing or headed for serious financial trouble. You have a cash shortfall ever month, and are forced to result to borrowing to make ends meet. If you are in this situation, you need to start making major lifestyle adjustments NOW! If you do not, you will inevitably end up experiencing a financial disaster. You may already be in a desperate situation, but if not, you are headed there quickly!
0.81 to 0.99 With a ratio in this range, you are still in the position of overspending. The good news is that financial disaster is not imminent. The bad news is that you have no room for a financial setback, such as a job loss or medical emergency. While you will have continued financial pressure, as long as nothing unforeseen happens and you still have good credit, you can probably maintain this position for some time. And, if you are serious about taking control of your finances, a few lifestyle changes may help you jump into the next category.
1.0 and Higher Congratulations! You are making more than you are spending. The higher your ratio is the better off you are! If your ratio is 3.0, this means that you are bringing in enough money on a monthly basis to cover your expenses for two months. People with a ratio over 2.0 should consider their investment strategies so that they can maximize their surplus income as a basis for wealth building.
When you take a look at your inflow to outflow ratio, you begin to get a better look at your current financial position. This will help you decide the best course of action for your future. One think to remember is that your ratio will change as often as your income and expenses change. For this reason, it is a good idea to calculate your ratio often.
Vincent Polisi is the founder of Credit Repair College. Credit Repair College empowers people to learn do it yourself
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