Dude, Where's My Cash?
How often does this happen? You withdrew cash from the ATM this morning. This afternoon, it's gone. Or you received your bonus (lucky you) yesterday. By the weekend, it's gone.
Time flies, and so does money. And you'd think, there's never enough to go around.
Last issue, you (hopefully) calculated your net worth. Now, you will come up with your cash flow statement. In short, how much cash comes in and how much cash goes out.
Before you draw up your strategy in achieving your financial goals, you need to know exactly where you stand in terms of cash flow. Net worth is important, but for some, cash flow is king.
Remember I wrote that net worth is the measure of financial wealth? Well, for some, it's not net worth, but cash flow. How rich are you really? You can look at it this way: If you stop working right now, how long will you able to sustain your lifestyle?
If your assets can support you for twenty years, then that's how rich you are. If you can live off your assets for five years, that's how rich you are. If it will take only three months before you run out of cash, then that's how rich you are. If you live paycheck to paycheck...you get my drift.
Some people are living on interest, or what people call "LOI". People who have inherited tons of money or have worked their way to wealth. But I'm getting ahead of myself. Before we all get depressed, we need to do a reality check and know exactly how we're doing in the cash flow department. Because this will determine what actions to take.
Again, I'm uploading a Personal Cash Flow Statement worksheet for your use. You can call it a personal income statement or spending record, whatever. The whole idea is, you need to know how much income goes in and how much expenses go out.
INCOME
On the Income side, list down all your sources of regular income. If you're employed, that includes your salary, allowance, commission, etc. That's "earned income".
If you're self-employed or own a business, put in the income you generate from the business that you use for personal expenses. That's "business income".
If you have investments or paper assets that generate dividends, interest, and the like, plug it in. That's "portfolio income".
If you have rental property or have equity in a limited partnership or business but not actively engaged in it, put it in. That's "passive income."
You can either plug in gross amounts then subtract taxes and other deductions to get the net amounts or you can just input net figures for simplicity.
If your income does not come regularly, such as commissions, you can add up what you earned last year and divide it by twelve months to get the average. It's tempting to include bonuses, but since you don't receive them on a monthly basis, take the conservative path and exclude them.
EXPENSES
Now, on the expenses side. Okay, this will be bloody. You need to know how much you spend every month. These are your regular monthly expenses, which includes household expenses like utilities, rent, or your mortgage. Then you have groceries, food, entertainment, and the like.
The best way to find out how much you spend and what you spend on is to track your expenses for a week, at least for this exercise. Then, adjust the amounts by tracking them for a month, and another month, and another, until you get a good idea of your average expenses per month.
Of course, you need to categorize these expenses. It's up to you what categories to use, but I suggest you keep the list short. Break down each category into more detailed accounts, such as Dining Out and Movies under Entertainment. Just make sure they're related.
That's not all. You just listed your "regular" expenses. Yes, you spend a lot more than you think. It's really the "irregular" expenses that can prove burdensome. These are expenses that you pay quarterly, every six months, or once a year, such as insurance, clothing (unless, of course, you make it a point to buy clothes every month), and annual fees. And those that you did not plan for, like emergency car repairs or dental work (ouch!).
You need to estimate how much you spend every year on these irregular expenses. And be realistic. Don't exclude clothing expenses just because the last piece of clothing you bought were those leather red pants three years ago.
For each of these irregular expenses, estimate how much you spend every year. Then divide by 12 months. That's how much you effectively spend every month.
NET INCOME
Now, subtract your total expenses from your total income and you get your net income. That is what's available for savings and investments. Well and good. Most likely though, you'll get a negative amount. That means, my friend, if you're a business entity, you're in the red.
Don't fret. At least now, you know where your cash is. It's in the pockets of your credit card company, your bank, your utility company, your cell phone company, your landlord, your friendly neighborhood mall, your local Starbucks, etc.
Next week, I'll show you how to make a spending plan that will free up cash to finance your goals.
