Assessing Your Financial Situation (Part 2)
In our last post, we discussed the first part of Assessing Your Financial Situation; Determining Your Net Worth. Today, we will look at the second part of this topic:
Analyzing Your Cash Flow
Your cash flow is a look at how you spend your money on a daily, weekly or monthly basis. It shows what comes in, your income, and what goes out, your expenses. Unlike the net worth statement which is a snapshot of your overall assets and liabilities, the cash flow is more like the running balance on your checking account.
It is important to analyze and review your cash flow on a regular basis because it provides a clear picture of how you spend your money. Reviewing your cash flow statement will help you to find ways to save more. It also helps you prepare for periods where your expenses will exceed your income.
The cash flow statement also shows whether you are living above your true standard of living or within your means.
The first step in analyzing your cash flow is to decide what period you want to examine. If most of your income and expenses occur regularly every month, use at a 4 or 8 week period. If you have irregular income (i.e. commission pay) or expenses, you will either need to figure an average per month or use a larger period like 12 weeks.
The second step is to list all of your income for the period you have chosen. Include your salary, dividends, interest, pensions, as well as, other income like child support, alimony or other legal settlements. These amounts represent your total cash available.
Next list all of your expenses for the period. Include all loan (car, mortgage, personal), credit card and debt payments. You will also need to include all of your insurance and utility payments. Finally include any other expenses that you expect like clothing, child care, food, gasoline, transportation (buses, subways, etc.), entertainment, dining out, charitable contributions or any periodic expenses (gifts, membership dues, taxes, etc.) that will occur during the time period you are using. These amounts represent your total cash spent.
It is important that you do not undervalue your true expenses. You may find it useful to use bank statements as a guide to include all of your normal expenses. The goal is to be as complete as possible. Don’t cheat yourself by trying to make your cash flow look better that it actually is.
The last step is to compare your total cash available and total cash spent. If you spend less than you have available you can save the excess or use it to pay down debt. If you spend more than you have available you run the risk of depleting your savings or having to rely on credit cards and loans to make up the difference.
Whether your cash flow numbers are positive or negative, knowing your net worth and understanding your cash flow are important as we move on to Step 2 of Laying a Financial Foundation: Setting Financial Goals.
