Hopefully you made it through building your net worth statement without losing your will to live. Next, turn your attention to the FLOW of money in your life. While I’ll refer to this tool as a cash flow statement, for personal finance, I refer to income statements and cash flow statements interchangeably. In the business world, these statements are two different tools that give somewhat different information. But for home finances, we don’t need to be that technically correct. I’ll call it a cash flow statement, because what we want to know is, where is all our money flowing? Is it flowing IN to our house faster than it is flowing OUT of our house? Let’s see!
For this exercise, pull out the list of income sources and expenses that you prepared a couple weeks ago here. Here are the main parts:
Income: Unlike the net worth statement, where assets (positive numbers) were numerous and required their own sections, I usually put all income into one category. Take your list of income sources and tidy them up as part of your cash flow statement.
- Examples of Income:
- Wages, salary, self-employment income
- Investment income
- Passive income, such as income from rental properties
Expenses: Again, this differs from the net worth statement. Over on the net worth, the liabilities (negative numbers in your life) were few and could be lumped together. Here, on the other hand, expenses are numerous, and life will be easier if you make some categories. I’m giving some examples but feel to make your own or rearrange these so they make the most sense to you. Here are some expenses you might have:
- Mortgage/rent payment
- Homeowner or renter insurance
- Property tax
- Vehicle loan payment
- Car maintenance
- Property tax
- Public transportation
- Medical and health
- Medical bills
- Pharmacy costs
- Health club membership
- Dining out
- Personal expenses
- Pet supplies
- Spending money
- Health insurance
- Disability insurance
- Auto insurance
- Home/renter insurance (if not included above)
- Life insurance
- Long-term care insurance
- Other debts
- Student loans
- Medical debts
- Credit card balances
- Emergency fund
- Retirement savings
- College savings
- Charitable Giving
Notes on expenses: Slice and dice your expenses in whatever way it works best for you. The above list is certainly not exhaustive but should get your mental juices flowing to make a comprehensive list. Some options include rearranging categories to put ALL debt payments together, or perhaps you organize them to showcase your spending priorities. There is no right or wrong way to organize this! Just make sure it makes sense to you.
I suggest that you either report all the income and expenses monthly OR annually. Whichever you prefer is fine. Don’t forget things like auto insurance, which typically is billed semi-annually.
Another suggestion is to decide whether you want to work with your pre-tax income or after-tax income. I recommend using after-tax income, particularly if you receive a paycheck that has taxes withheld. Just start with the net income on your check as your income and go from there. You likely will ignore retirement savings then, however, as this is typically deducted pre-tax – which is fine because what we really want to know is how your household money is flowing.
If you prefer to put your cash flow statement in terms of pre-tax income, just be sure to include categories for Federal and State income tax, as well as employer-sponsored retirement savings.
The goal here is to attempt to capture ALL your inflows and outflows. Go deep and be as thorough as you can so you don’t miss anything.
Compute your net cash flow: Calculate your total income and your total expenses.
Your income minus your expenses is your net income, or net cash flow.
Hopefully your net cash flow is a positive number. If it isn’t, then you are probably in a situation where you are racking up credit card debt because your income is inadequate to cover your expenses. If the net cash flow IS positive, where is that extra going? Into savings? In truth, your net cash flow should be zero, since you should have accounted for where every dollar went that came into your house. The money went somewhere, and your job is to be a detective and find out where!
Don’t give up. The more seriously and honestly you conduct this exercise, the better off you will be in the long run. Keep at it! Next, we’ll talk about how to take this tool and use it to study your spending habits. We’ll also look at how budgeting is a totally different process.
Subscribe to my blog if you would like to receive a weekly email digest of the week’s posts. Subscribing will help you stay up to date with ideas to help you build positive cash flow!
<Click here to get a free printable that will help guide you through building your own cash flow statement!>
Tell me how this project went for you! And feel free to ask questions.