Your personal (or household) cash flow statement and your personal balance sheet are the basic tools that you have in your possession to control your personal finances. Compiling your personal cash flow report is straightforward. However, very few people complete this exercise. You should devote some time if you want to have an accurate picture of your income figures and spending habits. Most people get really surprised when they complete this task. This is because they realize that their spending behavior is not compatible with what they earn.
In simple words, cash flow refers to what money is regularly moving in (income) and what money is regularly moving out of your wallet. Typically, cash flow is calculated over a given time interval like a month or a year. It is very important to track your income and expenses and to make the appropriate adjustments to your spending habits according to your financial objectives and constraints.
Your cash flow during a year can be positive as well as negative. A positive cash flow means that you earn more than you spend. On the contrary, a negative cash flow means that you spend more than you earn. Cash management skills are essential if you want to maintain a positive cash flow. The positive cash flow is the most important factor in increasing your net worth. With a positive cash flow you will be able to save more, invest more and thus increase the probabilities of reaching your financial goals. Moreover, if you earn more that you spend you will be able to repay your debt earlier and pay less in interest.
The first step in compiling your cash flow statement is to gather all sources of income and calculate how much money is coming in every month or year. Do not limit your calculations to your salary. Write down any source of income like business income, interest income, dividend payments etc. You are advised not to include non-recurring income such as a winning lottery ticket for instance.
The next step is to gather your regular expenses during a period. Regular expenses are expenses that are recurring such as your mortgage payment or rents, insurance payments, food, clothing etc. A cash payment for a car does not belong to the regular type of expenses because, normally, you do not buy a car each and every year.
In the last step of this exercise you subtract the total expenses from the total income to calculate the net cash flow. A typical personal cash flow statement should look like this:
In simple words, cash flow refers to what money is regularly moving in (income) and what money is regularly moving out of your wallet. Typically, cash flow is calculated over a given time interval like a month or a year. It is very important to track your income and expenses and to make the appropriate adjustments to your spending habits according to your financial objectives and constraints.
Your cash flow during a year can be positive as well as negative. A positive cash flow means that you earn more than you spend. On the contrary, a negative cash flow means that you spend more than you earn. Cash management skills are essential if you want to maintain a positive cash flow. The positive cash flow is the most important factor in increasing your net worth. With a positive cash flow you will be able to save more, invest more and thus increase the probabilities of reaching your financial goals. Moreover, if you earn more that you spend you will be able to repay your debt earlier and pay less in interest.
The first step in compiling your cash flow statement is to gather all sources of income and calculate how much money is coming in every month or year. Do not limit your calculations to your salary. Write down any source of income like business income, interest income, dividend payments etc. You are advised not to include non-recurring income such as a winning lottery ticket for instance.
The next step is to gather your regular expenses during a period. Regular expenses are expenses that are recurring such as your mortgage payment or rents, insurance payments, food, clothing etc. A cash payment for a car does not belong to the regular type of expenses because, normally, you do not buy a car each and every year.
In the last step of this exercise you subtract the total expenses from the total income to calculate the net cash flow. A typical personal cash flow statement should look like this:
| Salary | 50,000 |
| Business Income | 20,000 |
| Interest Income | 10,000 |
| Dividends | 5,000 |
| Other Income | 2,500 |
| Total Income | 87,500 |
| Rent | 0 |
| Mortgage | 20,000 |
| Loan Payments | 5,000 |
| Food | 15,000 |
| Clothing | 5,000 |
| Utilities Bills | 2,500 |
| Telephone & Mobile Phones Bills | 1,000 |
| Insurance | 3,000 |
| Auto Expenses | 2,000 |
| Fun & Recreation | 5,000 |
| Other Expenses | 5,000 |
| Total Expenses | 63,500 |
| Net Cash Flow | 24,000 |
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