What is your Cash Flow?

Cash flow is a term that is usually used by businesses however the same concept applies to you household finances. Basically your cash flow tells you how well you are managing your finances. It is the difference between the amount you make and the amount you spend. Clearly this number should be positive but in a disturbing number of cases it isn’t calculating your cash flow can be eye opening so it is a good idea to do it to see where you stand.

Cash flow is something that businesses think about all the time but it also applies to personal finances. Basically your cash flow is difference between how much money is coming in and how much money is going out. Ideally this number should be positive. If it isn’t you have a problem. A positive cash flow means that you are saving money. A negative cash flow means that you are using the debt to pay for the things that you buy. There are however times when a negative cash flow may be alright. For example if that negative cash flow will ultimately help to increase your wealth. The best example of this would be a mortgage to buy a house. It is alright to temporarily have a negative cash flow in this case however it can’t be allowed to go on for a long period of time. Otherwise you will end up too far in debt to be able to pay your bills.

Calculating your cash flow is a fairly straightforward process. All you have to do is take the money you earn and subtract the amount of money you are spending. The only real trick is to get an accurate accounting of how much you are spending. Most people underestimate how much they spend in a month because they leave all the small items out. Things like that morning coffee really add up to a lot of money so you need to account for everything. Once you get an accurate number for how much you spend each month it is pretty easy to calculate your cash flow.

The next question then becomes what represents a good cash flow. This is a very subjective question. At a minimum your cash flow should be positive. Except in a small number of very specific instances a negative cash flow is a real problem. As to how much of a positive number is good, that is much more complicated. A lot of experts say that the number should be ten percent of your income. However if have a low income this may not be possible and if you have a high income this may represent too low of a number. Ideally you should calculate your cash flow every year and see the number increasing. As time goes by you should be saving more and more money. This will help to make sure that you have money to retire.