Key Takeaways about Personal Cash Flow Statements
- Personal cash flow statements are an essential tool for understanding your financial health.
- These statements provide a comprehensive view of your income and expenses.
- Regularly updating and reviewing your personal cash flow statement can help you manage your finances more effectively.
- A well-maintained personal cash flow statement can provide insights into areas where you can cut down expenses or increase savings.
- The process of creating a personal cash flow statement involves detailed tracking of all your sources of income and expenditures.
- Personal cash flow statements can be instrumental in planning for future financial goals or investments.
- It’s crucial to understand the difference between cash inflows (income) and cash outflows (expenses) when creating these statements.
- Personal cash flow statements can also help you identify potential financial risks and provide a roadmap for mitigating them.
Understanding and Creating Your Personal Cash Flow Statement
Your overall financial health is mainly dependent on the income you earn and the expenses you pay. You probably receive multiple paychecks every month, but you also have bills to settle that reduce the funds you have available at any given moment.
There’s more to calculating your financial picture, though, because you have essential expenditures like food, insurance, transportation, utilities, and credit card payments that further erode your cash flow.
Many people have no idea how much they actually spend each month and are shocked by how little money they have left for luxury items or savings.
Creating a personal cash flow statement provides a clearer idea of your financial standing. It also allows you to adjust your spending and seek new income opportunities when necessary.
A cash flow statement is commonly used in business to indicate how much money a company is really making. You can use this idea in your personal life, too, by creating a balance sheet with your assets and liabilities and a personal cash flow statement outlining your income and expenses.
Seeing the numbers on paper can help as you make the necessary changes to your spending habits. This guide explains how to calculate a personal cash flow statement and what you can do with this information once you gather it.
Calculating Your Cash Flow
Creating your personal cash flow statement requires a thorough audit of your income and expenses. You’ll then see where you can make changes in your life to improve your financial standing. Calculating your cash flow involves the following steps:
Determine Cash Inflow
Your cash inflow is the money you earn every month. Figuring out this number is relatively simple, as you’ll gather your pay stubs, investment account statements, and real estate information and add the inflow values together to determine your income.
Remember that the investment earnings you reinvest don’t count toward your inflow.
Create a Cash Outflow Statement
Your cash outflow statement should include both discretionary and necessary spending, and since those numbers can vary from month to month, you’ll want to continue tracking your expenses indefinitely.
Items you might include on your cash outflow statement include your mortgage, car payments, utilities, health care bills, insurance, groceries, and gas. Nonessential expenses like entertainment, gym memberships, and vacations might also appear on your outflow statement.
Calculate Net Cash Flow
You’ll complete the process by subtracting your expenses from your income to calculate your net cash flow. Leftover money means you have a positive cash flow, giving you more funds to invest and grow your net worth.
A negative number means you aren’t living within your means and will have to make some adjustments to get back on track.
Calculating your net cash flow provides a picture of your financial health and can guide your decisions in the near future. You’ll also need a strategy for managing your cash flow to ensure you’re using your earnings to your advantage.
Four Tips for Managing Your Personal Cash Flow
Your personal cash flow statement will inform you of how you’re doing financially, and you can use this information to grow your wealth. It can also show you if you’re spending too much or need additional income to reach your goals.
Some tips for managing your cash flow include the following:
1. Develop a Budget
Creating a budget makes managing your cash flow and reaching your goals easier because it helps you reduce your spending.
Implementing the 50-30-20 rule—where you spend 50% of your income on essentials, 30% on luxuries, and 20% for savings or investments—can assist you in developing a budget that matches your income.
Understanding where your money goes every month makes staying on track more manageable.
2. Cut Your Expenses
You might have to cut your discretionary spending to align with your budget and maximize your savings. Most people buy multiple items they don’t need every month, which hurts their net cash flow numbers.
Cutting a few expenditures might ensure you have enough money to invest and can help you reach your retirement goals.
3. Find Additional Income Opportunities
Earning more income might be necessary if you can’t cut your expenses enough to improve your personal cash flow. Finding another income opportunity doesn’t necessarily mean you need a second job, though, as investing in real estate, dividend stocks, or other passive income streams can provide additional monthly inflow.
The result is more money available to you and your family every month.
4. Invest for the Future
Having a positive cash flow is great but you won’t continue making money forever, and putting some cash away for your retirement should be a priority.
It’s possible to set up automatic withdrawals to ensure you continue investing, or you can speak with a financial planner to create the ideal strategy to meet your needs. Your positive cash flow can work for you and help as you enter the next stage of your life, so you’ll need to figure out the best way to grow it long term.
Managing your personal cash flow and determining what to do with the money you have left over every month is perhaps the best thing you can do for your future. Starting the retirement planning process as early as possible is advisable because it gives these funds plenty of time to grow.
Speak to a Retirement Planning Expert
Time waits for no one, and retirement age can quickly sneak up on you if you don’t adequately prepare. A professional financial planner can answer all your retirement questions and assist you as you develop a long-term strategy, minimizing your concerns as you age.
Bogart Wealth offers financial and retirement planning services in Woodlands, Texas, and McLean, Virginia. Our team can answer any retirement question you have and put your mind at ease as you prepare for the next stage of life.
Contact Bogart Wealth for more information on our retirement planning services or to learn how a personal cash flow statement can assist you.
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