Step 13: Calculate your Cash Flow

Simply put, in personal finance your cash flow indicates how much money you have coming in on a monthly basis, how much is going out and how much the difference is.

As you might expect, having a positive cash flow, where you earn more money than that you spend, is what you want to pursue, as if the reverse is true, you are either building up debt or you are eating away your savings. Having a positive cash flow means you are living within or below your means, and not beyond.

This might sound easier than it is: there might be some months when you have more money coming in than going out, but other months the opposite might be the case, and if your income fluctuates a lot, this might concept might be especially difficult to control. 

When calculating your cash flow, you will add all your expenses together, including your saving expenses. Even though these are generally “positive” expenses because they improve your financial situation and work towards your goals, this is still money going out, regardless of whether you pay it into a savings account or put the money in a glass jar.

A positive cashflow means that even after deducting all of your expenses from your income you still have money left over at the end of the month. One could therefore argue that a neutral cash flow of exactly $0 might be the ultimate goal to work towards to, as that indicates that you are using all of your money for a purpose. So even if you  have $50 left over at the end of the month, you might decide to put that towards an extra debt reduction payment or a savings goal.

This again depends on your own goals (we will look at this later), as if your goal is to pay off your debt as soon as possible, then this might work for you, if on the other hand your goal is to build up a $500 cushion in your bank account, then keeping those $50 safely in your account might be the best option, in which case you will want to keep a positive cash flow for a while.

Step 13 – Calculate your Cash Flow – in detail

• Start with a new paper in your log book, a new tab in excel, a new note in Evernote, or whatever  programme you are using for your 100 steps mission, as you will want to update your cash flow overview regularly.
• In order to calculate your current net flow, start with your monthly income. Depending on how you have calculated your expenses, either put in your net pay, i.e. what you take home after paying taxes (if you haven’t included your income taxes in your expense lists), or your gross pay, i.e. before taxes (if you’ve included all the taxes you pay on your income as an expense).
• Work with your base monthly income, if you might get a bonus or extra payment during the year, don’t include these in your monthly income (you will find out why in a later step). If your income varies a lot, for example if you are a free-lancer or self-employed, either put down your average or your absolute minimum income that you make.
• Total all of your monthly expenses (fixed, variable, discretionary and savings).
• Subtract your expenses from your income.
• If the difference is positive, you are in a great position as it means you’ve got more money coming in than going out. As mentioned above, you want this money to “do” something for you. Whether it is $20 or $600 you have left over at the end, you don’t want your money to just sit there in your account doing nothing. But more on this to follow.
• If the balance is $0, you are either several steps ahead already, or you have absolutely no flexibility at the end of the month and often need to cut out or cut back in order to make it to the next month. Getting on $0 isn’t bad in itself, if all of your money is doing exactly what you want it to do, but if it is the case that you only just make it to the end of the month, we need to work on this. In the next few steps we will tackle this situation.
• If the result is negative, we have a bigger problem as it means there is more money going out than coming in, which is never good and especially long-term this is not sustainable. It means you are either losing money quickly, or building up debt.
• Mark in your calendar again to monthly check your cash flow and record how you are doing here so you get a better idea of what your cash flow look like over a prolonged period of time, and to check on any changes you might need to make and to analyse how effective they are.

There you go, you’ve got yet another new number and concept added to your financial understanding and register. More to come later, but for now appreciate how little by little with each step you are becoming more and more financially literate.