Mastering your cash is an essential part of your financial situation. To become successful with your money, you need to understand your cash flow. The purpose of this is to ensure you are living within your means and saving for the future.
Here are the steps to come a cash flow master:
1) Calculate your total monthly income. Make sure you don’t leave anything out – employment income, second job income, gifts, etc.
2) Calculate your total monthly expenses.
Break your expenses into fixed, variable and savings.
- Fixed expenses are items that will be there every month. These items are necessities. They will probably not be the same amount each month, but you will always have them from month-to-month. Such as rent, mortgage, car payment, utilities, etc.
- Variable expenses are items that are not essential to living, but make life a little more enjoyable. These can be eating out, hobbies, entertainment, etc.
- Savings. I recommend treating savings like a fixed expense. You should pay yourself before any of your variable expenses each month. By putting money into savings you will help create your cash cushion for those rainy days.
3) Subtract your expenses from your income. Once you have done this, you will notice one of three things:
- Break-even: you do not have any extra income or have too many expenses each month – nice work! This is your goal!
- Surplus: You are making more money then what you need for your expenses. Look into increasing your savings goal or paying off any debt.
- Deficit – You are spending more than you are making. You need to cut out some expenses or try to make more money.
I recommend tracking your expenses to get a good idea of just how much you are spending. It’s important to be clear and honest with your cash flow statements. Track spending for 90 days to get a good idea. Expenses are those that you spend cash for, transfer money, swipe a debit card or credit card or write a check for. Make sure you keep a notebook handy to track everything.
Once you have tracked for 90 days you can compare to your list from #2 – your expenses. Make sure you haven’t overlooked anything.
If you have questions on how to create an accurate cash flow statement, give us a call at 573-686-3053. We’re here to help you.