KJ: One of the most critical concepts to managing your family’s finances is to understand cash flow. What it means, how your family receives it, and how to plan around it. We’ve dedicated a post to helping you understand this financial metric and how you can apply it to your personal situation.
Definition of cash flow
Cash flow is essentially a look at all of the monies deposited into your account from whichever sources derived less all of your expenses and cash outflows – in whatever form it may be.
Make an inventory of your cash inflows
Make a list of your income and income cash flows. It may be earned income or it may be considered “unearned.” Include specific information about the regularity of the cash flows (weekly, biweekly, semi-monthly, quarterly, yearly) as well as the level of certainty (regularly recurring, one-time payments, variable payments (commissions, bonuses), etc.). Below is a list of a few common income flows:
Income from bonds paid to you*
Income from stocks paid to you*
Income from other investments or business interests*
Income from a savings account paid to you*
Credit card bonuses or rewards (we save ALL of these!)
*Pay particular attention to only include these items in your household’s cash flow if there is some regularity to them and the amounts are paid to your checking account and not reinvested within the account. If the amounts are simply reinvested or paid within an account you don’t use for your expenses or cash flow, then counting them is not going to help improve your cash flow!
Make an inventory of your cash outflows
Prepare an equally detailed list of all of your expenses. Pay particular attention to the timing, amounts, and frequency of each expense that you may have in a year. Below is a list of common expenses to consider:
Mortgage (including interest, taxes, and insurance)
Homeowner’s Association dues (HOA)
Insurance (life, health, auto, disability, etc.)
Food (groceries, dining out, fast food)
Utilities (television, internet, phone, water, gas, electricity)
Pet (grooming, food, veterinary)
Medicine/Doctor (medication, doctor visits)
Savings account contributions
Investment account contributions
Taxes (state and federal income tax – can be yearly, quarterly, and/or withheld from a paycheck)
Travel (hotel, estimated food, airline)
Credit card payments and interest (hopefully you’re not paying any and the cards are paid off!)
Child support paid
Evaluate the net number
Add up all the income sources and subtract out all of the expense categories for each month. If you find that you come up with a negative number, then something’s gotta give – no wonder you’re having cash flow issues!
If you and your family have a complicated cash flow situation with irregular income payments, then consider projecting out all of these items throughout the course of a year.
Even if your calculation turns out positive, doesn’t mean you’re on the track that you need to be. Look closely at the savings contributions (IRA, 401(k), HSA, savings, investment account) to make sure you are putting aside the amount of money you need.
Having a comprehensive view of where all of your expenses are going will allow you better decision-making power to choose how to reallocate those scarce resources. It could allow you the knowledge to know when, where, and how to cut out certain items from the budget if something unexpected happens – like a roof repair, fallen tree, or garage breakdown!
AJ: The need to “find” money in order to cover additional expense costs in a given month is my ongoing motivation for budget tracking. What comes in is pretty consistent in our household but what goes out is always variable. We’re constantly making improvements to our home, getting involved in charitable opportunities and going out with friends and family, so variable expenses are the name of our game. Without understanding the in there’s no way to stay ahead of the out.
KJ: One reality you may be living is you could have a very positive net worth or savings targets, but your cash flow is very tight in certain periods throughout the year – particularly common for what I call “lumpy” cash inflows throughout a year. Figuring out both when and why those happen can help you single out what can be done. Maybe it’s keeping more in a readily accessible savings or emergency fund or maybe it’s switching the timing of some of your expenses (as able) to help get you on track. Try funding those irregular expenses into a specific account each month to make sure there is sufficient cash there when the expense is ready to be paid. This can be very common with life insurance premiums, quarterly taxes, or real estate taxes, but you may find you have other expenses like this.
- What tools have you used to build a cash flow statement for you and your family?
Are you cash flow positive or negative?
Share with us the tools you are using to get on track or to stay on track.
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