Personal Finances – Part 2: Cash Flow

In Part 2 of my Personal Finance articles we will discuss Cash Flow. If you have not yet read Part 1 on Budgeting, you may do so here: Personal Finance - Your Budget but it is not necessary in order to understand cash flow. This is the second of the four (4) critical components that allow you to better control your family’s finances and keep more money. As stated in Part 1 the four components are:

1. Budget
2. Cash Flow
3. Income Statement
4. Balance Sheet

Cash Flow is simply the amount of liquid funds that come into and go out of your accounts each month. Where your Budget is your plan for success, Cash Flow measures how well your plan is working. In your personal finances, there are several ways to monitor cash flow, the most common being your check book register.

Periodically you should balance the register against your bank statements and reconcile all of your expenses and deposits. With online banking it is easy to balance and reconcile your accounts anytime you need. At the very minimum make sure to balance and reconcile monthly. I recommend doing this weekly to keep on top of active accounts.

As you monitor your cash flow keep the following tips in mind:

• Budget Buddy! Monitoring your Cash Flow weekly will give you immediate input as to how your Budget is performing and what you may need to do to bring things back in line. If your Cash Flow comes up negative several months in a row, your budget is not working. Fix it!
• Cash Count! One effective method for keeping on budget is to remove the cash allotted for an item, say entertainment, at the beginning of the month. Watching the cash disappear from your wallet or purse helps you visualize how fast you are spending on this item. Then when the cash is gone you don’t get any more of that item for the month.
• Cash Confusion! One warning to the above method. Make sure that you keep the withdrawn cash for separate items in separate places. When you take cash from an ATM it only shows up as a cash withdrawal on your statements, so it is up to you to track the actual spending. If you combine your withdrawals and the associated cash, let’s say entertainment ($100) and lunches ($200), when the money is gone you may not be able to remember how much you spent in each category and thus whether your budget is effective. Do not lose track of your spending!
• Beware Negative Flow! Let’s face it, regardless of how hard you try, sometimes you will spend more in a month than you bring in. Don’t beat yourself up over it, but do take time to figure out what went wrong. Once you have determined the cause decide if it was an anomaly or if you need to rethink your budget to account for this is the future.

• Burn Rate and Projection! In addition to tracking what you’ve spent in the past, it is a good practice to project your future expenditures. This is a little different than your Budget as projection comes down to your best guess of how that budget will be spent each day. For example, let’s say that you have budgeted $300 a month for lunches. This comes out to a “Burn Rate” of roughly $10 a day. By the time the 15th of month rolls around you realize you’ve spent $200 of your budget because one day you went to an expensive restaurant with your coworkers. Not a big deal, however your Burn Rate for the first part of the month has been $200/15 = $13.33 per day. This means to stay within your budget you can no longer spend the $10 a day you originally planned. Instead you will have to adjust your Burn Rate to $100/15 = $6.67 per day. Looks like it’s going to be McDonald’s for the rest of the month (I recommend the salads.) Tracking your Burn Rate let’s you control how fast your budgeted amounts are used.
• Save the Positive! When everything is working you will come in on or under budget each month. On the occasions when you have money left over, make sure to move this to savings. It is okay to keep about a $200 cushion in case of overages, but if you are going over budget by more than that in any given month it is time to review your plan!

At first it will be difficult to be aware and keep track of all your spending. It is so easy to just whip out the debit card or throw down some cash and be on your way without thinking about what you’ve just purchased. “It’s just my morning Starbucks, not worth worrying about, ” you may think. If this happens as little as twice a week, you may find yourself $40 over budget at the end of the month and have no idea why. However, keep at it and once you get in the habit it will become second nature and sticking to your budget will no longer seem like a chore, but rather an ingrained part of your mindset that helps you keep more of the money you’ve worked so hard to obtain.

Next up Income Statements!. . . .

PERSONAL FINANCE SERIES
Part 1: Budget
Part 2: Cash Flow
Part 3: Income Statement
Part 4: Balance Sheet