You wouldn’t keep filling a pitcher with water if it was leaking like a sieve, would you? If you did, no matter how hard you worked, your efforts would be futile. Likewise, if you don’t know how and where your cash flows, your efforts towards financial success may be futile.
Here are the three things that you must know before you can take control of your finances:
How much money comes in i.e. your cash inflow
The first thing you need to know is how much money you have coming in weekly, biweekly or monthly. This might seem like an obvious no-brainer, but a surprising number of people do not know their cash inflow. This can be especially true if you have multiple streams of income – from a working spouse/partner or a side business, for instance.
A simple remedy is to take a look at all your bank accounts and, using a simple table in a spreadsheet, list out all the times you have had money deposited in your account. Note the frequency of these deposits. Do you have cash that flows in once a year? That is important to note since you will treat it differently from cash that flows in weekly.
If you are part of a household with shared financial responsibilities, it is important that you know how much cash is flowing in from the other members of the household.
How much money goes out i.e. your cash outflow
Once you are clear about your cash inflow, the next logical question is how much cash is flowing out?
As you would expect, your cash outflow will produce a much longer list than that of your cash inflow. That is normal. What should not become the norm is your cash outflow exceeding your cash inflow. When it comes to determining your cash outflow, be brutally honest. Set some time aside to examine your bank accounts, including cash withdrawals. Money spent on seemingly small items, such as a daily cup of coffee, can easily be overlooked. Taking a closer look might reveal that those ‘small’ cash outflows add up to quite a bit.
Don’t be disheartened by what you find after performing this exercise. The point is to be aware of your expenses so that you know the appropriate adjustments to make.
Upcoming cash flow changes
Do you have upcoming financial changes? For instance, are you expecting a decrease in income during maternity leave, or an upcoming pay increase at work? Have you thought of how you will manage any such upcoming cash flow changes?
Thinking and planning ahead of any changes will help you manage your finances better than if you wait until the change is upon you. If it is an increase in cash inflow, you may end up spending it on unnecessary items. If it’s an increase in cash outflow, you may find yourself getting deeper in debt. To prepare for these changes, look ahead 6 to 12 months, and identify any changes that you expect to occur. Make plans for those changes now instead of waiting until they occur. For instance, you could set up an automatic withdrawal into a savings account starting on the day you expect a pay increase, or you could start saving for an expected loss of income.
Conclusion
When you don’t have a clear picture of your cash flow, it is difficult to make meaningful and lasting financial plans. It’s ok if you are unable to make adjustments at the moment; having a clear picture of the situation will ensure that you know the adjustments you need to make, and you can work towards making them.