If we asked you to invest your money into a company that didn’t make any, you might think we were crazy right? Or if you knew about a business that made money, but frivolously spent it all, would your common sense tell you they are doing something wrong?
Cash flow, and managing it, are important to any successful business; and it should be important to managing your household. On its face, cash flow is a simple concept. You compare how much money you have coming in versus how much is going out, and where it is going. Notice we didn’t say how much “needs” to come out. That is because if you are like most American households, credit card debt is too high, student loan payments are unbearable, and spending may be out of whack.
Cash flow is one of the many factors financial analysts look at when comparing companies and their respective stock values. Being cash flow positive (turning a profit), and having a healthy level of liquidity, both show good decision making by management and the ability to get through rough times.
So is your household turning a profit? Do you have the liquidity to get your family through tough times? If not, then we have some really good news! Managing the cash flow for your family is much easier than doing it for a business, and you have a plethora of tools available to help you do it! You should have far less categories of expenses for your family than for a company, and preparing for the future is much more intimate when it comes to your loved ones instead of when the accounts receivables department’s copy machine lease is up.
The first thing to do is start with a hard, honest look at your paycheck and your spending. We recommend basing your spending and saving goals off your net income. After all, that is the money you actually get to see and touch. Look at the past three months of your bank and credit card statements to see where you spend the most. If you have a lot of ATM withdrawals, then look at your Instagram account to see how many pictures from parties and bars you have. They might be a hint to where your money goes (hey we ain’t judging, we’ve been known to fist pump too).
Next you will need to do the math. If your statements reveal overdraft fees, late fees, and/or cash advances on credit cards; then put the calculator down, we already know you’re in the red. If the difference between what you have coming in compared to what money you have going out isn’t an amount you like, then it’s time to review your budget. If you’re in the majority of households when it comes to budgeting, then you’ll need to start one (because most don’t do it). The plan will be to prioritize what you need to pay, what you need to save for, and slowly make the progress to building up your cash savings. They will really come in handy when those rough patches in life spring up.