The key to staying on top of your personal finances is to understand exactly what affects them. You probably know about some factors that affect your finances, such as your credit score, your investments and your savings accounts. However, many people forget about personal cash flow.
Your personal cash flow plays a big role in your overall net worth. It can be helpful to understand the flow of your money when putting your finances in order. So, what is personal cash flow and why is it so important?
One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.
So, what is personal cash flow all about?
Personal cash flow is a measure of your financial incomings and outgoings. It is usually presented in a cash flow statement and can be either positive or negative.
A positive cash flow indicates that you can comfortably afford your monthly expenses and have some money left over for other purposes, such as savings. A regular negative cash flow is a sign that you may need to review your spending habits or access credit to get back on track.
Personal cash flow is a useful tool to use when creating a budget. The statement compiles all of your earnings and spending together so that you can clearly see how much money you have to work with.
How to calculate your personal cash flow
A personal cash flow statement can be a very useful tool for anyone who wants to crack down on their spending or create a budget.
To calculate your personal cash flow, you will need to work out how much money you have coming in each month. This could include your monthly salary, benefits and grants, and any secondary streams of income that you may have, perhaps from a side hustle. Most people work with a specific time frame, for example, monthly earnings for the past six months.
Next, you need to subtract any monthly expenses from your total income. This should include anything that you have paid for, including dinners with friends, fuel for your car and even money spent on new clothes. The final figure represents how much money you have left each month.
If this figure is negative, it shows that you currently spend more money than you can reasonably afford.
Why is personal cash flow important?
Understanding your cash flow is a great way to create a strong budgeting plan. Otherwise, it can be easy to forget small purchases or expenditures that could result in you overestimating what you can afford to spend.
Working out your monthly cash flow is also a good way to ensure that you are on track with your finances. If your goal for 2022 was to become better at saving, understanding your cash flow will be a strong indicator of how much you’re putting away. A high positive figure means that you have ‘spare’ money that you could put into a savings account.
How to improve your personal cash flow
To improve your personal cash flow, you will need to ensure that your incomings are higher than your outgoings. This could mean reducing your monthly expenses, increasing your earnings.
Here are a few ways that you could improve your cash flow:
- Pay off your debts
- Ask your employer for a pay rise
- Start a side hustle
- Create a form of passive income
- Cancel unused subscriptions
- Reduce your monthly bills by shopping around for better deals
- Cut down your food shopping bills by trying different products or brands
- Try a no-spend challenge
- Take a month away from luxury appointments (the nail salon, personal trainer, etc.)