The next part of the picture is just as important, if not more so, as the balance sheet. It wasn’t until early this year that the concept really clicked with me. Sure, I had used a budget for years but this put things in a new perspective.
The cash flow statement is the simple picture of the amount of money moving in to your finances (income) versus the amount moving out (expenses).
First we list our income for the month with one type or source per line and add them up. That gives us Gross Income.
Then we take all of our expenses and list them with one category or source per line and add them.
Finally we subtract the expenses total from gross income and we arrive at our Net Income for the month. If this number is negative, it means we spent more money than we made. Warning! If the number is positive, then we’ve made money for the month. If we have positive cash flow we should look at how we’re going to put the surplus to work.
Always have a plan for allocating surplus cash. Otherwise, it can disappear. For example, right now my plan is to put any surplus cash to work paying down outstanding debt.
A Note on Credit Cards
It can be especially easy to spend more than you make with credit cards. They’re easily available and credit limits can creep up beyond what you can handle.
Before I looked at my cash flow, I didn’t realize that I was falling farther into the whole because I was always able to make more than my minimum payment each month. What I wasn’t seeing was the fact that I put more on the card that month than I paid. Floating along like this for five or six years with regular credit limit raises led to quite a deep hole. At the worst of it, I think we had around $28k on cards. All generating interest!
Looking at the Categories
Now that I look at all of my expenses each month by category, it’s much easier for me to see what I can do to improve my situation. I can now see if we’re spending too much and where we need to cut back. Of course, some expenses are fixed. I actually break my expense list down into two sections: fixed expenses (mortgage, loans) and variable expenses (groceries, restaurants, fuel).
I like to use spreadsheets for most of these tasks. Google Sheets is awesome because it lets me access my data from anywhere without having to install software. There are also some handy Sheet Templates for budgets and cash flow. You could also track your cash flow with online tools such as Personal Capital or Mint.
Good luck and keep an eye on those expenses!