Managing how much money your household spends compared to your income is a foundational financial skill. By understanding your cash flow, you can gain awareness of where your money goes. This allows you to adjust your budget as needed and stay on track toward your short-term and long-term financial goals.
What Is Cash Flow?
Cash flow is your income (inflow) minus your expenses (outflow) over a set period of time. The term “cash flow” is often associated with businesses, but households and individuals can track their income and expenses in much the same way.
The process is relatively simple. You’ll need to track how much money is coming in, and how much money is being spent, over the length of time you’re interested in. Although tracking on a monthly basis can be helpful, having at least three months of data gives you a more balanced view and helps account for expenses that don’t occur every month.
What Can Your Cash Flow Tell You?
One of the most basic, yet foundational insights you can learn from tracking your expenses is whether you are cash flow positive (taking in more money than you spend) or cash flow negative (spending more than your income).
Getting cash flow positive can pave the way for reaching larger financial goals and setting aside more money in savings. If you are currently spending more than you are making, it’s important to consider why this might be the case.
Even if you’re cash flow positive, there could still be changes you could make to work toward your financial goals. Your cash flow is just one piece of the financial puzzle and should be viewed along with other information to help you pinpoint areas for improvement. For example, if you don’t have an emergency savings, it’s a good idea to find room in your budget to start setting aside more money.
Improving Cash Flow
If you want to increase the extra money you have available, there are two general ways to do this: increase your inflow or decrease your outflow.
Increasing Your Inflow
Bringing in more money helps improve your cash flow, although it is often a more complex consideration than cutting expenses. You can explore adding extra sources of income, or potentially ask for an increase in pay depending on the circumstances.
Reducing Your Outflow
Decreasing how much you spend is another way to increase the money you have left over. To do this, start by looking at where exactly you are spending your money. For some expenses, you may not have much flexibility, such as your rent or mortgage. For others, like subscriptions, you may be able to cut back.
Take Charge Of Your Finances
Understanding your current financial situation helps you work toward your short-term and long-term goals. If you’d like personalized assistance with financial planning, Wellspring can help. Our advisors are here to support you with understanding where you are now financially, where you’d like to be in the future, and how you can get there.
Contact us today to learn more about our financial planning services.
Wellspring Financial Partners, LLC does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
