When you go to the doctor for a routine checkup, your doctor checks your vital health signs by taking your blood pressure and checking your heart rate and respiratory rate. Unfortunately, we don't have such widely available diagnostic tools to check your financial health. But that doesn't mean you can't give yourself a financial health checkup.
In our prior post, What Is Financial Health?, we provided an overview of the six vital signs of financial health. Today, we're taking a deeper dive into the second vital sign: cash flow.
Cash flow is a measurement of the amount of cash that comes in and out of your finances over a period of time. When you have more cash coming in than going out, you have a positive cash flow. When more cash goes out than comes in, your cash flow is negative.
If you want to afford to buy things without relying on debt, grow your savings, and start investing, you need positive cash flow.
To put it in even simpler terms, cash flow is what you're able to save after paying all of your bills and covering your day-to-day expenses each month. The more consistently you spend less than you take in, and the greater the difference between your income and spending, the stronger your cash flow vital sign will be.
Businesses stay on top of cash flow by creating a Statement of Cash Flows, which analyzes cash inflows and outflows over a particular period. You can do the same for your personal finances.
You can create a personal cash flow statement on paper, in a spreadsheet, or by using a financial health platform like Harvest.
While calculating your cash flow for one month can be eye-opening, it's a good idea to do this monthly, or at least over several months, since some expenses are irregular. For example, if you own a home, you might pay property taxes twice per year. You may pay your car insurance bill annually, or spend more on gifts or dining out in some months.
Once you have a good idea of how cash is moving through your finances, you can begin to make changes to improve your cash flow. Here are some ideas to get started.
Whether you ask for a raise, look for a better-paying job, start a side business, or sell unused items online, making more money can improve your cash flow by improving the income side of the equation.
Go over the list of expenses in your personal cash flow statement and look for ways to trim your expenses.
Those are just a few ideas to start spending less. Each money-saving idea on its own might make a small difference in your monthly cash flow, but combining strategies can result in big savings over time.
If tracking every dollar you spend isn't your cup of tea, try the 50/30/20 Rule.
This budgeting strategy recommends budgeting your income in three broad categories:
You can make this budgeting method even simpler by depositing paychecks into multiple accounts: 50% to one checking account for needs, 30% into a different checking account for wants, and the remaining into a savings or retirement account. This helps reduce the temptation to overspend in the wants category at the expense of your savings.
If you're new to tracking your cash flow vital sign, don't be discouraged if you're starting in the negative. The key is to understand how you're spending your money. Once you get everything on paper, you can determine which spending categories are essential and which are luxuries. Then you can see where you need to tweak your spending to improve your cash flow.
Janet Berry-Johnson is a freelance writer and CPA with a background in accounting and income tax planning and preparation. As a regular contributor to Business Insider, Money Crashers, and several other online publications, she helps make complicated tax and personal finance information accessible to readers.
Harvest helps increase the net worth of the 99% through artificial intelligence and financial automation. To date, Harvest has refunded over $2M in bank fees and interest charges to its members with the ultimate goal of increasing the net worth of everyday Americans by $1 trillion by 2030. Our platform starts with providing immediate relief through bank fee and interest charge refunds, orients a member's financial health with our proprietary PRO Index™, and keeps track of net worth over time aided by our suite of financial tools. Check out our 8-step guide on "How to Build Wealth from Nothing" to get started on increasing your net worth.
Disclaimer: Harvest is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.