If you’re often surprised when you open up your credit card and bank statements and see how much money you spent, or you worry that your cash outflow may be exceeding your cash inflow, there could be a simple solution: A personal cash flow statement.
Creating a personal cash flow statement can give you a clear picture of your monthly cash inflow (money you earn) and your monthly cash outflow (money you spend) to determine if you have a positive or negative net cash flow.
And while it may sound intimidating, creating a personal cash flow statement is relatively simple. All you need to get started is to gather up your bank statements and bills for one month (or more). Then, it’s a matter of some basic calculations.
Once you have your personal financial statement, you’ll know where you currently stand. You’ll also be able to use your personal financial statement to help you create a budget and goals for increasing your net worth.
Here’s how to start getting your financial life back into balance.
What Is a Personal Cash Flow Statement?
“Cash flow” is a term commonly used by businesses to detail the amount of money flowing in and out of a company.
Companies can use cash flow statements to determine how well the company is generating cash to pay its debts and operating expenses.
Just like the ones used by companies, tracking your own cash flow can provide you with a snapshot of your financial condition.
You might learn, for example, that you have less leftover at the end of each month than you thought, or that you are indeed going backwards.
Once you have the numbers down in black and white, you can then make any needed changes, such as reducing costs and expenditures, increasing income, and making sure that your spending is in line with your goals.
So, how do you set up a personal finance cash flow statement?
It might seem overwhelming to get started, but these steps can simplify the process.
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Listing all Your Sources of Income
A good first step when creating a personal cash flow statement is to get out all of your pay stubs, bank statements, credit card statements, and bills.
Next, you’ll want to start listing any and all sources of income–the inflow.
Cash inflows generally include: salaries, anything you make from side hustles, interest from savings accounts, income from a rental property, dividends from investments, and capital gains from the sale of financial securities like stocks and bonds.
Since a cash flow statement is designed to give a snapshot into the overall flow of where your money is coming from and where it is going, you might want to avoid listing money in accounts that aren’t available for spending.
For example, you may not want to list dividends and capital gains from investment accounts if they are being automatically reinvested, or are part of a retirement account from which you aren’t actively taking withdrawals.
Since income can vary from one month to the next, you might choose to tally inflow for the last three or six in order to come up with an average.
Once you’ve collected and listed all of your income for the month, you can then calculate the total inflow.
Listing all of Your Expenses
Now that you know how much money is coming in each month, you’ll want to use those same statements and bills, as well as any statements for any debts (such as mortgage, auto loan, or student loans) to list how much was spent during the month.
Again, if your spending tends to fluctuate quite a bit from month to month you may want to track it for several months and come up with an average.
To create a complete picture of how much of your money is flowing out each month, you’ll want to include necessities like food and gas, and also discretionary expenses, such as trips to the nail salon or your monthly streaming services.
Small expenses can add up quickly, so it’s wise to be precise.
Once you’ve compiled all of your expenses, you can calculate the total and come up with your total outflow for the month.
Determining Your Net Cash Flow
To calculate your net cash flow, all you need to do is subtract your monthly outflow from your monthly inflow. The result is your net cash flow.
A positive number means you have a surplus, while a negative means you have a deficit in your budget.
A positive cash flow is desirable, of course, since it can provide more flexibility, and can allow you to decide how to best use the surplus.
There are a variety of options. You could choose to save for an upcoming expense, make additional contributions to your retirement fund, create or add to an emergency fund, or, if your savings are in good shape, consider a splurging on something fun.
A negative cash flow can signal that you are living a more expensive life than your income can support. In the future, maintaining this habit could lead to additional debt.
It’s also possible to have net neutral cash flow (all money coming in and going out is fairly equal).
In that case, you may still want to jigger things around if you are not already putting the annual maximum into your retirement fund and/or you don’t have a comfortable emergency cushion.
The Difference Between a Personal Cash Flow Statement and a Budget
A personal cash flow statement provides a comprehensive look at what is currently coming in and going out of your bank accounts each month.
A cash flow statement tells you where you are.
A personal budget, on the other hand, helps you to get where you want to go by giving you a spending plan that is based on your income.
A budget can provide you with some general spending guidelines, such as how much you should spend on groceries, entertainment and clothing each month so that you don’t exceed your income–and end up with a negative net flow.
Creating a budget can also be a good opportunity to check in with your financial goals.
Are you interested in tackling the credit card debt that has been spiraling due to high interest rates?
Perhaps you want to work toward paying off your student loans.
Whatever your goal, a well-crafted budget could serve as a roadmap to help you get there.
Using Your Personal Financial Statement to Create a Simple Budget
Because a cash flow statement provides a comprehensive look at your overall spending habits, it can be a great jumping off point to set up a simple budget.
A good first step in creating a budget is to organize all of your monthly expenses into categories.
Spending categories typically include necessities, such as rent or mortgage, transportation (like car expenses or public transportation costs), food, cell phone, healthcare/insurance, life insurance, childcare, and any debts (credit cards/ loans).
You’ll also need to list nonessential spending, such as cable television, streaming services, concert and movie tickets, restaurants, clothing, etc.
You may also want to include monthly contributions to a retirement plan and personal savings into the expense category as well.
And, if you don’t have emergency savings in place that could cover at least three to six months of living expenses, consider putting that on the spending list as well, so you can start putting some money towards it each month.
Once you have a sense of your monthly earnings and spending, you may want to see how your numbers line up with general budgeting guidelines. Financial counselors sometimes recommend the 50/30/20 model, which looks like this:
• 50% of money goes towards necessities such as a home, car, cell phone, or utility bills.
• 30% goes towards your wants, such as entertainment and dining out.
• 20% goes towards your savings goals, such as a retirement plan, a downpayment on a home, emergency fund, or investments.
Improving Your Net Cash Flow
If your net cash flow is not where you want it or, worse, dipping into negative territory, a budget can help bring these numbers into balance.
The key is to look closely at each one of your spending categories and see if you can find some ways to trim back.
The easiest way to change your spending habits is to trim some of your nonessential expenditures. If you’re paying for cable but mostly watch streaming services, for example, you could score some real savings by getting rid of that cable bill.
Not taking as many trips to the mall or cooking (instead of getting takeout) more often could start adding up to a big difference.
Living on a budget may also require looking at the bigger picture and finding places for more significant savings.
For example, maybe rent eats up 50% of your income and it’d be better to move to a less costly apartment. Or, you might want to consider trading in an expensive car lease for a less pricey or pre-owned model.
There may also be opportunities to lower some of your recurring expenses by finding a better deal or negotiating with your service providers.
You may also want to look into any ways you might be able to change the other side of the equation–the inflow.
Some options might include asking for a raise, or finding an additional income stream through some sort of side hustle.
One of the most important steps towards achieving financial wellness is cash flow management–i.e., making sure that your cash outflow is not exceeding your cash inflow.
Creating a simple cash flow statement for yourself can be an extremely useful tool.
For one reason, it can show you exactly where you stand. For another, a personal cash flow statement can help you create a budget that can bring the inflow and outflow of money into a healthier balance.
Creating–and sticking with–a budget that creates a positive net cash flow, and also allows for monthly saving (for retirement, a future purchase, or a rainy day) can help you build financial security and future wealth.
If you need help with tracking your spending, a checking and savings account with SoFi may be a good option for you.
With SoFi Checking and Savings®, you can see your weekly spending on your dashboard, which can help you stay on top of your spending and make sure you are on track with your budget.
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