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.

What is 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.

How to track your personal cash flow

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. 

1. Record all sources of income for one month. This includes money from your paycheck or business, interest or other investment income, money from a side gig, etc. Only list the income that is available to be spent. For example, you might earn dividends in your 401(k) or IRA, but you wouldn't list those on your cash flow statement because it's automatically reinvested.
2. Track all of your expenses for one month. Note every time money leaves your accounts or your wallet – from paying your rent or mortgage to buying a cup of coffee. You can track these expenses in categories, such as housing, transportation, insurance, groceries, dining out, medical, personal care, entertainment and debt payments. Or you can simply list all transactions and total them up at the end of the month.
3. Subtract expenses from income.  Add up your total income and subtract total expenses. That's your cash flow for the month. If your cash flow is positive, you can use some of that money to build an emergency fund, pay down debt, save for retirement, or work toward other financial goals.  If your cash flow is negative, it's time to look for ways to improve your cash flow.

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. 

How to improve your cash flow vital sign

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.

Make more income

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. 

Reduce your spending

Go over the list of expenses in your personal cash flow statement and look for ways to trim your expenses.

• Cancel memberships and subscriptions you rarely use.
• If you tend to shop online when you're bored, take up another, less costly habit.
• Rather than dining out several times a week, cook dinner at home more often and pack your lunch.
• Plan meals around what's on sale at the grocery store, clip paper or electronic coupons, or shop at a lower-cost store.
• Shop around for less expensive homeowners, renters, or car insurance.
• Consider refinancing your mortgage, student loan, and credit card debt if you can find a lower-interest alternative.
• Try "second hand first" when buying clothes, electronics, furniture and household goods by hunting for bargains on gently used versions from thrift stores, consignment shops, yard sales and online resale sites.
• Negotiate discounts with your cable or internet provider.
• Borrow books, e-books and audiobooks from your local library for free rather than buying them.

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.

Try the 50/30/20 Rule

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:

• Budget 50% toward your needs such as rent or mortgage payments, utilities, insurance, groceries, and transportation.
• Budget 30% toward your wants – the fun stuff, like concert tickets, dining out, or meeting up with friends for brunch.
• Budget 20% toward savings for your emergency fund, retirement accounts, and other savings goals.

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.

Bottom line

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.