I’ve begun to learn about personal finance in the last couple years. One basic thing that screams, “IMPORTANT!” at me is cash flow. Cash flow is the amount of money you’re left with at the end of every month. So if you receive 50,000 a year and spend 40,000 you have a positive cash flow of 10,000.
Steps to financial freedom
A couple months ago I wrote about knowing where all your money is. Not the balance in each account, but knowing where the money comes in, goes out, and sits tight. The next step is watching where your money is moving, and how much of it. At its simplist, the goal is to have 3 numbers: money in, money out, and the difference. Tracking it monthly is a great way to start.
This isn’t a budget or a plan. It’s not a slap on the wrist or a pat on the back. The point of the exercise is not to draw fancy charts or feel bad about spending. It’s simply a picture of where your money moves each month.
Why you need to make the effort
Rich people track their cash flow. People who don’t track their cash flow have trouble sleeping. There’s no peace and joy in that! And just the process of being aware, not even putting in any extra effort, can bring change and raise your cash flow. I’ve started walking more to save buying fuel for the car. I’ve been making coffee at home rather than stop at the cafe. These are only small things but they feel easier because I see that bottom line every month and know it makes a difference.
Note: This can be scary. I still find it somewhat gulp-inducing to tally the monthly figures because it’s shocking how much the small stuff adds up. But the only way out is through so please take a deep breath and try it.
Let’s keep this simple
Step 1: The most work involved is keeping track of every cent you spend. I save my receipts and a couple times a week, I add them to running totals in a paper workbook. You could use your phone to record the amounts you spend, or just the back of a business card in your wallet. Even if it’s a small amount for parking or a tenner you lent a friend, add it in.
Step 2: Use a full size sheet of paper or an electronic program if you want. At the end of the month write down 4 things:
- The month
- The money in: how much came to you in wages, interest, dividends, gift certificates, bills you find on the street and other income.
- The money out: how much you spent on daily purchases plus bills and unusual expenses (insurance, vacation, deposit payments, etc). Don’t include cash you withdrew from the bank, only what you spent.
- The cash flow: money in minus money out. This can be a negative number. Don’t get too attached to it, it’s only a snapshot of finances in the last 30 days.
That’s it. You can categorise expenses, which gives less intimidating subtotals but highlights your bad spending habits. Do try to stay under 15 major categories, otherwise they become meaningless categories of one or two things each. Just remember, the monthly cash flow is a grand total, so add up all the categories for the bigger number.
The best reference books for tracking cash flow are Your Money or Your Life* and The Cashflow Quadrant*.