Personal Cash Flow: What to Know

Knowing where your money is going is a crucial step to both save more and preserve what you already have. However, many people look back and realize they’ve been overspending or, even worse, moving backward. Cash flow analysis allows you to take a careful look at what you’re spending over a certain period and adjust your habits.

This article will break down how cash flow analysis works and why it’s important. You’ll also learn how a financial advisor can help manage your in-flow and out-flow to help you save more money.

Understanding Cash Flow Analysis

An individual’s cash flow is the in-flow and out-flow of cash over a given period. For instance, if you subtract your monthly expenses from your income, you’ll come up with your net cash flow. This metric helps both you and a financial advisor track how much you’re saving and spending in a particular month, quarter, or year.

Typically, an advisor may conduct an in-depth financial analysis to gain an idea of how much you’re spending vs. saving. This allows them to identify opportunities for you to create a budget and have more to invest. To do so, a professional will help devise a personal cash flow statement, which is essentially a balance sheet that tracks your income and expenses. A statement includes all of one’s income, including investments, and both discretionary and non-discretionary expenses.

Cash Flow vs. Budget

Cash flow planning and budgeting are often used synonymously; however, there are significant differences between the two concepts. The former refers strictly to the in-flow and out-flow of cash that one experiences. A budget, on the other hand, is a tactic to allocate spending and saving, as well as to ensure your net cash flow is higher. In short, the latter helps you manage your income and expenses for more positive results.

Why It’s Important

It’s crucial to have a complete picture of your finances. Without an understanding of where your money is going, you won’t be able to save as much as you need to invest or be prepared for emergencies. Managing your cash flow allows you to spot opportunities to ensure you spend less and, potentially, increase your income if you need to.

When people think of cash flow management, budgeting likely comes to mind. However, without an idea of how much money you net each month, it’ll be difficult to plan an effective budget. Think of your cash flow as a simple, top-level view of your finances, which allows you to zoom in and begin taking action to improve.

Without proper cash flow planning, it can be quite easy to go into debt or begin losing money each month. For instance, consider a household with four children that makes $8,920 after taxes and spends $7,550 per month. While the family has a net flow of $1,370, they could easily be in the red with additional discretionary purchases or an emergency expense. With an understanding of their cash flow, they are more well-equipped to avoid spending pitfalls and continue to save money.

How Financial Advisors Help Manage Cash Flow

Managing your cash flow effectively allows you to be more financially stable and reach your goals. However, it can be a tough task for the average individual. For this reason, it’s smart to work with a financial advisor to ensure you have a strategy in place that works for you. Here’s how a professional can help you manage and improve your situation:

1. Create a Personal Cash Flow Statement

The first step a financial advisor would likely take is to help build a personal cash flow statement on your behalf. This document works much like a balance sheet, tracking your income and expenses during a particular period. On it, you’ll mark down every income stream and any costs you incur, such as debt, groceries, or discretionary costs.

To get a true understanding of your cash flow from month to month, your advisor may want to wait a few months before making any conclusions. This allows them to monitor patterns and gain a clearer picture of where your net amount typically lands.

2. Set Goals

Once both you and your advisor know what your monthly cash flow tends to be, they can work alongside you to set realistic and attainable financial goals. For example, you may want to develop an emergency fund or contribute more to your Roth IRA each month. Whatever the goal, you’ll sit down with your advisor to discuss how much you’ll need to net each month to achieve it.

3. Develop a Budget

Based on your cash flow and goals, your financial advisor may help you establish a budget. This is essentially a way for you to allocate your spending and savings so that you can reach your goals. For example, many experts recommend the 50/30/20 rule, which breaks down as:

• 50% of income towards necessities
• 30% towards discretionary purchases
• 20% towards savings and investments

The budget that works for you may not be the same as the one above, however. As you sit down with your advisor, you’ll be able to develop a plan that’s tailored to your goals, cash flow, and spending needs.

4. Debt Management

Debt is one of the major reasons why one’s cash flow would be in the red each month. More specifically, high mortgage debt, such as from credit cards, vehicles, and student loans, is the most dangerous. Your advisor can assist you with assessing and repaying your debt, including by either refinancing or consolidating it, if necessary.

Which Types of Financial Advisors Help

It’s important for you to find the right financial advisor to help manage your cash flow. In general, a financial planner is likely to be the most qualified professional to assist with this task. We recommend looking for individuals with a prestigious designation, such as a certified financial planner (CFP) or chartered financial consultant (ChFC), which holds them to a high level of expertise and ethics.

If you need help finding a high-quality financial advisor in your area, consider using a free matching tool, such as this one. After filling out a short quiz regarding your goals and current financial situation, it’ll pair you with up to three vetted professionals.

Frequently Asked Questions

How do I calculate my personal cash flow?

Your net cash flow is the difference between your income and expenses. To find it, simply subtract how much you make each month from what you spend. Be sure to include income from investments, as well as expenses for both necessities and discretionary purchases.

Is cash flow management the same as budgeting?

To put it simply, cash flow management is the practice of determining how much you net over a certain period of time, such as a month. Budgeting, on the other hand, is a tactic to keep track of your spending and ensure your cash flow remains positive.

Why is a personal cash flow statement important?

Your personal cash flow statement is essentially your balance sheet, where you can easily see your income and expenses all in one place. By keeping one, you’ll be able to calculate your cash flow honestly and accurately.