How Cash Flow Analysis Help Your Financial Situation
If a review of your net worth suggests that something needs to be done to improve your financial situation, the best way to understand the problem is to compare what you earn to what you spend. This is called a cash flow analysis. It gets to the basic question of how much of your income is spent on debt service, consumption, and savings. It also answers the question of how much more you are spending than you have coming in—or vice versa.
It is not easy to get the necessary information to do a good cash flow analysis. Start with your checkbook, credit card statements, and tax records. The most difficult information to get will be what you spend on cash purchases. The best approach is to keep a journal for a couple of weeks to get a pattern and then estimate the amounts factoring in your personal experience. Income information should be available from your tax records.
From your cash flow statement analysis, you will know where your money goes and whether your outgo exceeds your income. Also, you can set goals and plan to overcome problems in your personal finances. These goals and plans become a budget, or working guideline, for the coming year. This is a surefire way to simplify your personal finance situation.
It is estimated that two-thirds of American households live paycheck to paycheck. This creates a problem. They are never able to save anything to meet future financial needs. As a result, they may never be able to retire or, if they do, they will be faced with a meager existence. By getting your income and outgo in balance, you can have a brighter financial future.
If you’re having trouble putting enough aside to fund your retirement, here are some ideas that will help.
Summarize your spending. Look over your cash flow analysis and summarize your spending in three categories. First, calculate the amount of your monthly fixed expenses. This includes rent or mortgage payments, utilities, car payments, gas and oil, and operating expenses. Second, calculate your necessary variable expenses. This includes taxes, insurance, car and home repairs, and doctor and dentist bills. Third, calculate your discretionary expenses. This includes gifts, contributions, and entertainment.
Set up three bank accounts. The first account should be a money market account with check-writing privileges, the next a regular checking account, and the third another money market account.
Deposit all income into a money market account.
Write two checks. Deposit an amount to cover your monthly fixed expenses into the checking account. Deposit 1/12 of the annual total of your variable expenses into the other money market account.
Allow savings to build up in the money market account until you have a balance at least equal to three months’, and preferably equal to six months’, net take home pay. This is your emergency fund. Save it to cover times when your income is interrupted by illness, disability, or unemployment. When your emergency fund is in place, consider investment alternatives for your savings.
As you search for extra income to free up for savings or to retire debt, you may want to take a close look at discretionary spending. Consider such things as entertainment, clothing, food, personal care, and allowances. Monitor expenditures and set monthly allotments in areas you are scrutinizing. This will help you limit spending in one area so you can allocate those dollars to another priority. For example, if you have a monthly entertainment allotment of $100, you simply stop spending in this category when you reach that amount.
By doing above steps, it is easier for you to do cash flow analysis of your current financial situations. It help you in better understand where your lag and ahead from your initial planning. Along the way you can still fine tune base on your cash flow statement to achieve your financial goals.