One of the most important financial topics: Cash flow
You might think, “cash flow doesn’t apply to me, these are my personal finances, not a business.”
It’s true, cash flow is typically a term only used to describe a financial metric in businesses. But, it’s as critical in your personal finances as it is in a business.
Simply, cash flow describes the movement of money in and out of your accounts. When you get paid, that is inflow. When you pay a bill, that is outgo. What can be difficult, is managing this so that there is always cash flowing in and always enough for the outgo – the expenses.
Someone recently told me something like this, “I never can seem to get ahead of my debts. I pay them all off, and then I rack up another one.” This is a cash flow problem. If you find yourself turning to a credit card, because your bills exceeded your income, this is a cash flow problem. If you find that you are spending more than you are bringing in, this is a cash flow problem.
In a business, any of these scenarios are problematic because it demonstrates the business isn’t sustainable. A negative cash flow represents the same problem for our personal finances.
What can we do to navigate cash flow issues in our personal finances?
Create a spending plan and follow it.
Expect the unexpected expenses and save for them. Go through your credit and debit card statements and pick out expenses that you hadn’t planned for. Incorporate them into your spending plan.
Pay off debt strategically. Only pay the minimums on your debts and then if you have extra money that isn’t needed for something else, then apply it to one of your debts. If you might need that money for something else (like 5 below), don’t use it to pay off existing debt if it will result in future debt.
Forecast your income and outgo. Look at what you know you will be receiving over the next month, and what you know you have to pay. Assess whether you will have a positive or negative cash flow.
Create a savings account that can serve as a cushion for truly unexpected expenses or decreases in income. If you’re self-employed, this is critical. This allows you to take time off or support you should income be slower than anticipated.
Together, these steps will help you take charge of any cash flow problems you might be experiencing, or at a minimum, help you feel clear, confident, and in control of your finances!