Now that you’re tracking your balance sheet, and you’ve identified a key goal, you’ll gather the data on you cash flow. In our last blog post, Gaining Financial Control Step 1: Balance Sheet, we set a goal of increasing net worth by 10%. If your net worth is $100,000, you’ll need to increase it by $10,000 over twelve months. A combination of increased savings, return on investments, and paying down debt will fuel this growth.
Let’s look at cash savings first. Cash flow drives increased savings. It is defined as:
Income – Expenses = Cash Flow
Net Cash Flow
If the money you earn (your income) is more than the amount you spend (your expenses), you’ll have positive cash flow. You can add that excess cash to your savings and investments or apply it to debt. If it’s negative, however, you’re either living off of your savings or increasing debt, which are typically not sustainable long-term strategies.
Sometimes, negative cash flow isn’t a problem. For example, if you use your savings to meet expenses in your retirement years, you’ll have negative cash flow. If that is part of your long-term plan, and you have sufficient assets to fuel expenses, that is not a problem. However, if you are unintentionally living on negative cash flow, you likely won’t meet your financial goals.
So, how do you track your cash flow? One way is to create a spreadsheet such as the one below. List all of your income sources for the month. This includes income from your primary job, other work, rental income, dividends and income from investments, etc. Then subtract your expenses from all sources—bank accounts, credit card statements, etc. Below is an example for the month of August:
Here, August net cash was $6,500 – $2,300 or $4,200. That $4,200 can be used to increase savings or reduce her debt, both of which will increase net worth. If the savings is added to an investment or retirement account, those assets will grow over time thus increasing net worth even more.
Find the Patterns
As with net worth, the key is to track cash flow over time and find patterns. Here’s a view over two months:
While August was a positive month, September was not, and savings was needed to meet expenses. However, over the two months, net cash averaged a positive $3,600. Because we have competing demands from month to month, the key is to track spending monthly until you start to recognize patterns and can anticipate cash needs over periods of time.
Create an Action Plan
Once you have a general sense of monthly net cash, you can start making some choices to intentionally achieve your net worth goal.
- If you consistently have negative cash flow, you’ll first need to figure out how to make it positive.
- Once you have consistent positive cash flow, you can decide how to use that excess cash– to increase savings or decrease debt.
If you don’t want to manually enter all your savings into a spreadsheet, you can track cash flow using a tool that aggregates your spending data like Mint (www.mint.com). Mint allows you to connect all of your accounts so that you can see all your data in one place. If you conduct your banking online, your bank likely has a similar online service. Copper Seed can assist with data aggregation as well. While these services aggregate your spending data, they often don’t allow you to easily see data over time in one place. So, if you use a data aggregation site, make it a point to put the data into a monthly spreadsheet so you can see long-term patterns.
In our next edition, we will explore ways to ensure positive net cash consistently.
