Budgeting – Know your cash flow
When creating a personal or household budget it is critical to its success to understand your cash flow. Cash flow is the measurement of money coming in against what is spent.
A cash flow statement is a document outlining your income versus expenses over a period of time, which could be weekly, monthly or quarterly. Creating a personal cash flow statement will help you get a better understanding of your overall financial health and allow you to manage your finances more effectively.
Cash flow is made up of two main elements:
- Income – including wages or salary, pensions, income from dividends and/or other investments such as rental income. Basically any money that is coming into your bank account.
- Expenses – these include all regular expenses such as mortgage, rent, any loan repayments, electricity, gas and other utilities, insurances, food, clothing, petrol and entertainment. One off and discretionary expense’s should be included. Basically anything that results in money leaving your bank account.
Once you have determined your income and expenses, you can determine your net cash flow. A positive cash flow means that your income exceeds your expenses, where as a negative cash flow is a result of your expenses exceeding your income.
From this cash flow statement you can now get a better understanding of how your finances are tracking. Don’t be discouraged if you have a negative cash flow: the key to the cash flow statement is to understand how you are spending your money and identify opportunities to cut-back or make adjustments. This also applies to a positive cash flow – cutting back on some areas you may consider a luxury, such as dining out, may help you reach your financial goals sooner.
Armed with a better understanding of your cash flow, you are now in a position to create a smarter budget that is realistic and in line with achieving your financial goals.
The team at Greentree Financial would love to help you achieve your financial goals. Contact us today.