Now that you know how to calculate your net worth, the next step is to understand your personal cash flow. Just like a business creates a statement of cash flows, you too can create a personal statement of cash flows.
Why is this important? By understanding your cash flow you can budget your expenses to make sure that you are saving more than you spend. Then with the money you save, you can increase your net worth by investing in assets or reducing your debts.
I prefer to calculate my cash flow in Excel so I can save the template and update it regularly, but feel free to do whatever works for you. To start, you should list the days in the next two months beginning with today’s date. Why two months? Because of the delay in credit card billings, if you only put your statement balance in your cash flows, you won’t be including your money that you owe that will come due in the following month.
Next, determine how much cash you actually have, including the money in your bank account and hard cash in your wallet or purse. Record the amount of cash you have next to today’s date. This is your starting point.
Now think of all your income and expenses you will incur over the next two months. These are the “ins and outs” in your cash flows. Record those amounts in the appropriate days. For example, if you get paid bi-monthly, record your income as a cash inflow on the 1st and 15th of the next two months. Your income will include paychecks from working and any other income you have and will be represented by positive numbers in your cash flows. Expenses include credit card payments, rent or mortgage payments, student loan payments, gas, groceries, etc., and are represented by negative numbers.
To the right of this column, keep a rolling balance that is the sum of all the activity back to today’s date. That way you will know how much cash you have on any given day in the next two months. Remember, you can be as detailed with your cash flow as you want. I update my cash flows every other week for large expenses or when I know I will be making more money in a given week, but if you want, you can update it more frequently to include your daily purchases.
I will add an example of my cash flow template, so check back for updates!