Cash flow refers to the difference between money coming in and money going out, and can be calculated for individuals, as well as businesses. A positive cash flow indicates that liquid assets are increasing, while a negative cash flow means more money is being spent than is coming in.
Money coming in
Cash flow depends on two numbers: the money you have flowing into your bank accounts from wages, investments, and other sources, and the money flowing out to pay your bills and other expenses.
Money flowing in can take several forms, and when calculating your own, be sure to account for all of the money being you're being paid. This may include, but is not necessarily limited to:
- Wages, salaries, and tips
- Interest income
- Social Security benefits
- Pension income
- Child support
Money going out
Figuring out how much money flowing in is the easy part for most people. It can be far more difficult to accurately determine how much money is going out the door. Some expenses are big and difficult to forget, such as your mortgage payment, while others can be small, such as money you spend on gasoline or entertainment.
Just to name some of the many potential ways money might be flowing out of your pocket, here are some common categories to get you started.
- Mortgage or rent
- Car payments
- Student and other loans
- Credit card payments
- Taxes (federal, state, FICA, etc.)
- Home and auto maintenance
- Child care
- Insurance (car, home, life, etc.)
Calculating your cash flow
There are literally hundreds, if not thousands, of ways that money could be flowing out of your wallet, so to make the cash flow calculation easier, here's a calculator that can do it for you. You can choose to input monthly or annual figures, but you need to be consistent throughout -- in other words, don't put your annual income data and monthly expenses.
Again, if the result is positive, that means you're bringing in more money than you're spending. On the other hand, a negative cash flow indicates that money is leaving your pocket quicker than it's coming in, and that's generally a bad sign.
Also note that this calculator does not include saving, such as IRA contributions, or money you put into an emergency fund. While these aren't technically "expenses," they should still be accounted for. In other words, just because you have a positive cash flow doesn't mean you're spending money responsibly. The ability to save also needs to be considered.
Projecting future cash flow
It might also be useful to calculate how your cash flow could change in the future, especially if you're expecting your incoming cash to increase. For example, if your salary rises, but your mortgage payment and other expenses stay the same, it could cause your cash flow to increase significantly. Here's another calculator that can help you do just that.
The bottom line on personal cash flow
Knowing your cash flow can help you determine whether you're using your income responsibly, or if your spending might be a bit excessive. Once you know your cash flow, you can use the information to make appropriate changes to your spending habits, if necessary.