How to Be Master of Your Cash Flow
Financial security requires mastering all kinds of personal finance skills but perhaps the most fundamental is managing your cash flow – or the money you have coming in and going out.
To accomplish everything from maintaining a basic quality of life to building wealth, earning enough money and spending within your means is critical.
Managing your cash flow can be a particularly difficult financial skill to master, according to experts, but doing so can give you the financial foundation you need for future success.
What Is Cash Flow and Why Is It a Hard Skill To Master?
“Cash flow is by far the most challenging aspect of financial planning for both individuals and families,” says Kimberly Malesky, certified financial planner at Harmony Investment Management LLC in Montecito, California.
Cash flow represents the income you have coming in compared to the money you have going out. Despite being a basic building block of money management, getting a handle on cash flow trips up even seasoned financial pros.
“For a long time, I had big financial goals that I consistently failed to meet. I never went broke or anything, but I just couldn't seem to save up any money, even when I got raises or tried to cut out certain spending habits like getting coffee on the way to work,” says Ann Martin, director of operations at the website CreditDonkey.
Many struggle with similar issues, balancing the money they earn with how much they need to spend on bills, plus other goals like emergency savings and retirement planning.
But Martin and Malesky agree that mastering your cash flow doesn’t have to be impossible – as long as you follow the right strategies.
How Is Personal Cash Flow Calculated?
The first thing you’ll need to do to get a handle on your cash flow is calculate your current status.
“To track yours, start by adding up all of your income sources and then subtracting your required monthly expenses,” says Jake Hill, CEO of the website DebtHammer.
Be sure to include both active and passive income sources. When looking at spending, start with your needs, then move on to wants, carefully tracking exactly how much you spend per month.
“List everything essential that you spend money on each month: mortgage/rent, car insurance, health insurance, utilities, groceries and more. Most people try to add manicures, travel, dining out, shopping, etc., to their essential list. But they are not essential to your living,” says Malesky.
How to Create Personal Cash Flow
Once you better understand your current state of income versus your spending, you can start to make changes to maximize your cash flow – by trimming fat from your budget or adding additional sources of income.
“Having money left over after you've paid your expenses is excellent but you can improve your cash flow with savings and investments,” says Hill.
Follow these three tips to create more personal cash flow:
1. Automate Your Savings
“With your budget in hand, determine the maximum amount you can comfortably save or invest each month and begin putting that amount aside. This will help you build your net worth over time,” says Hill.
Saving money is easier said than done, even if you already have space in your cash flow to do so. To avoid the temptation to spend leftovers, Martin recommends setting up automated deposits into a savings account each month.
“I started by scheduling all of my automatic bill payments to come out of my checking account the day after my paycheck came each month, then I took the further step of opening a savings account and automatically transferring 20% of my money into it every month,” she says.
Building your emergency fund should come first so you don’t have to go into debt if times get tough, but after that, you can direct your savings toward money-earning pursuits like investments.
2. Adjust Your Budget
The next step is to take a look at your budget and make adjustments if any spending is out of hand.
For instance, if your rent is too high for how much you earn, your travel fund eats into your bill payments or your dining out bills have gotten too high, you can take steps to research other options or redirect funds in a more logical way.
According to Martin, you’ll need to be honest with yourself about undisciplined financial decisions you tend to make, then budget to account for them.
Still, that doesn’t mean cutting out all the purchases that bring you joy.
“Hyperfocusing on the number of Starbucks drinks you buy each week is not helpful. Work backwards, deciding how much money you have available to spend on extras each month, and budget that piece. This approach is not only more palatable, but most important, is more effective in yielding positive results,” says Malesky.
3. Generate New Income Streams
Maybe your budget is tight and you’re still struggling to bring in enough money to save. This is one of the trickiest realities of cash flow, and the only solution is finding ways to generate more income.
“Should you figure out you need to increase income to reach your goals, consider alternative sources of income aside from your main profession,” says Malesky.
This might take the form of passive income, which could come from real estate or other investments, or a side hustle to bring in active income, like pet sitting or delivering food.
