Personal cash flow management is the foundation of financial stability for businesses and individuals. Managing personal cash flow involves balancing your income and expenditures. This ensures that you are able to meet your financial obligations (short- term and long-term goals) without encountering any setbacks.
If you’re a small business owner, law firm partner, sales person, or freelance employee––anyone with an unpredictable income, managing your personal cash flow well can be essential in improving your financial wellbeing.
What is Cash Flow in Personal Finance?
Personal cash flow isn’t just the movement of money in and out of your accounts during a certain period of time. Managing cash flow well involves understanding exactly how much money you earn, along with how much you spend. Understanding your cash flow and managing it effectively can empower you to make smart, well-informed decisions, backed by greater confidence. In certain cases, it might lead to taking thoughtful or intentional risks, such as taking a slightly lower-paying job that you truly enjoy or are passionate about, or increasing your longer-term investments once you are confident that your short-term needs are taken care of. Managing personal cash flow well can influence decisions around investments, taxes, education, retirement, risk management, wealth transfer strategies, and more.
Two primary components make up your personal cash flow: inflows and outflows.1 Inflows include any source of income earned, such as your salary, investment returns, revenue from sales, and loans. Outflows are all of your expenses: your monthly bills, mortgage, rent or loan payments, and other financial obligations.
Why is Cash Flow So Important?
Effective cash flow management helps to ensure that you spend less money than you earn, with enough liquidity and cash stashed away to prepare for emergencies or unexpected expenses. How can you improve your personal cash flow? The following tips can help you get started.
Simple Tips for Personal Managing Cash Flow:
– Crunch the numbers.
First, take a close look at one of your paychecks or your annual W-2 wage statement. This shows you exactly how much income you earn after taxes and retirement contributions are deducted. Next, examine your bank statements, credit card bills, and personal savings accounts. Outside of the regular contributions made to your retirement accounts, how much cash did you put away? This will show you how much you earned, saved, and spent.
Remember to include any additional purchases made using mobile cash apps such as Venmo, Zelle or Paypal.
– Track your personal cash flow.
Team Hewins advisors recommend evaluating your cash flow every quarter. This will identify any spending patterns or trends, which helps you anticipate potential cash shortages and surpluses. Then, you can make the right adjustments when necessary.
You can also organize your expenses into different categories. There are many tools and software available that can help you, from Team Hewins’ Living Expense Worksheet template to more advanced accounting or budgeting software.
– Reduce your expenses.
Identify simple ways to lower your expenses without sacrificing quality of life or convenience. You can do this by negotiating lower interest rates on any outstanding loans, canceling unused subscriptions or memberships, and finding less expensive options for various expenses.
– Don’t forget about inflation and emergencies.
Team Hewins advisors warn that most people don’t think about the many small ways that inflation, lifestyle creep, and expenses can add up. Unfortunately, remodeling your home or experiencing a medical emergency can quickly drain your savings.
Set aside a regular amount of your income each month for unexpected costs. This emergency fund can be used to pay for major home or vehicle repairs, medical bills, or rising food prices due to inflation.2 Your savings should cover at least three to six months’ worth of living expenses, giving you a financial safety net to fall back on should something unexpected occur.
To help simplify your saving habits, set up automatic withdrawals to be deducted from your paycheck and deposited into your savings account regularly. This will help boosting your financial well-being steadily over time, while giving you peace of mind.
– Deal with your debt.
Effectively managing your debt can dramatically improve your personal cash flow. Pay off any past-due bills as soon as possible. Consider consolidating and refinancing your loans to reduce your monthly payments. This can make it easier to contribute to your savings account, retirement funds, or investments.
– Plan ahead.
Now, it’s time to start looking ahead. A Team Hewins advisor can help you set short- term and long-term financial goals. An advisor will work with you to understand your priorities, such as saving for your children’s college education, buying real estate investments, starting your own business, purchasing a second home, increasing retirement contributions, or investing more of your income.
An advisor can help break down your goals into smaller, more manageable milestones to help you create a realistic plan to get there.
PRO TIP: Few people realize how quickly inflation, lifestyle creep, and expenses can add up. Unfortunately, major expenses can dramatically affect your personal cash flow. Make sure to set aside a regular amount of your income each month.
How Does Having Irregular Income Affect Personal Cash Flow Management?
A law firm partner, contract worker, or business owner who earns an irregular paycheck may find it harder to manage their cash flow. The less predictable nature of their income and the lack of tax withholding can make managing one’s personal cash flow more difficult.
For example, a law firm partner may earn a variable income due to their unpredictable case load or annual bonuses. This can make it harder to accurately predict month-to– month cash flow. This person may typically receive smaller regular paychecks, a large paycheck each quarter, and a substantial year-end bonus. However, because taxes aren’t withheld and their income is less predictable, they must learn to manage their cash flow and tax burden more efficiently. That’s why working with a Team Hewins advisor, who will coordinate with a certified tax professional, can be helpful.
To improve their personal cash flow management, a law firm partner or small business owner can take the following steps:
- Understand exactly what’s coming in. Use a personal expense tracker to take into account your current lifestyle, large purchases, tax burden, and expenses. It might be helpful to create a detailed monthly budget that focuses on cash flow. A Team Hewins CERTIFIED FINANCIAL PLANNER™ professional can assist with this step.
- Be prepared. Because of the less reliable nature of their income, a law firm partner or contract worker must plan ahead for financial emergencies. Having even more than the typically recommended savings cushion of three to six months of expenses can give an irregular income earner peace of mind.
- Set goals. Meeting with a financial advisor can help a small business owner or law firm partner align their personal cash flow with their long-term goals. While many people may know what their financial objectives are, they often need help understanding exactly how they’ll reach those goals. A financial advisor can help align one’s investment and tax strategies with their overall spending values.
- Break goals down. Goals can be easier to achieve when they are broken into smaller, more manageable steps. Once a small business owner or law firm partner has established their overall objectives, a Team Hewins advisor can help them break down their goals into smaller milestones, creating realistic, achievable timelines. Reaching those mini goals can establish momentum and encourage people to keep progressing. This can make it easier for individuals to manage their cash flow effectively.
PRO TIP: Evaluate your cash flow every quarter. This can help identify your spending habits, allowing you to anticipate potential cash shortages or surpluses
Team Hewins Can Help Boost Your Personal Cash Flow Management Strategy
Effective cash flow management is an essential part of financial stability and success. By tracking your cash flow, reducing expenses, building an emergency fund, and planning effectively, you can gain better control of your finances and more easily achieve your long-term financial goals. Remember, managing your cash flow is not just about the money coming in. It’s about making smart decisions with the money you have.
