The How & Why Of Personal Cash Flow Statements.
Unlike a net worth statement, which is a snapshot of a moment in time in your financial life, a personal cash flow statement is a portrayal of your net monthly cash flow. There are a number of ways to measure your overall financial health. Using a variety of tools like the two mentioned above in combination will give you the most accurate picture of the state of your finances.
The only way to attain wealth is to earn more money than you spend, hold onto it and make it grow. This is not possible if you operate with a deficit month in and month out. Here lies the importance of essential cash flow management.
Below are some important factors to consider as you prepare your personal cash flow statement.
A cash flow statement is designed to list all sources of income that affect your cash flow, not just your salary from your day job. Below this section is a list of income streams to consider adding to your cash flow statement. However, you should only add the income sources that are available for spending. For example, investment income and dividends are listed as forms of income, but you wouldn’t list those on your cash flow statement if they are in retirement accounts or are automatically reinvested.
On the same token, you need to record all expenses, including regular and irregular expenses. For example, some of your expenses may come quarterly, semi-annually, or annually. You may wish to break those down into a monthly approximation (examples could include insurance premiums, taxes, homeowner’s association fees, investment contributions, etc.). Groceries and utilities are also expenses that can be approximated to smooth out your cash flow statement.
The following is a list of income sources that you may wish to include in your personal cash flow statement. You will need to tailor it to your needs.
- Salary 1
- Salary 2
- Self-employment income
- Freelance/consulting income
- Government benefits (unemployment, disability, VA benefits, welfare, etc.).
- Child support/alimony
- Investment Income
- Interest income
- Capital gains
- Social security
- Retirement plan distributions (401K, IRA, withdrawals)
– via cashmoneylife.com
More Pieces To The Puzzle
Guides to help you build your personal cash flow statement are very helpful, but remember that ultimately you must think about your own financial life. Call to mind all of your income sources and all of your expenses. It doesn’t matter if they happen every month, quarterly, or annually. You must include everything that impacts the flow in and flow out of cash in your financial life.
Here is a look at the basic components of a personal cash flow statement and an explanation of two of the important expense components.
Some of these components include:
1. Components of Income
2. Fixed Expenses
3. Discretionary Expenses
Components of Income:
Income can be derived from salary, bonus, hourly, self-employed, passive or investment sources. In some cases, you can control your income, i.e. working longer hours or a second job, taking on additional clients, or choosing investments that provide higher levels of income. In most cases, control is limited.
Fixed Expenses, also known as structural expenses, are those foundational costs over which you have little monthly control. For example, rent, mortgage, and utilities; the bills come in every month and while you might move to a slightly cheaper apartment, or turn the thermostat down in the winter, without structural changes, this category is pretty locked in. A structural change might mean, moving to an area where property costs are less or moving into a smaller home.
Discretionary Expenses are those where you make choices and therefore, more control can be exerted. For example, you can shop at discount stores rather than premium name brand stores that feature the allure along with higher price tags. One might ask the benefit of buying facial tissues or laundry detergent at high priced supermarkets, other than convenience. You can choose whether to invest your vacation dollars on a trip to Europe or a less costly domestic adventure. You get the point – the choices you make heavily impact the amount of your paycheck in this department.
– via Forbes
Do you have a personal cash flow statement?