Cash flow refers to the difference between the money you bring in, and the money that you spend. Positive cash flow means your liquid assets are increasing, while negative cash flow often means your expenses are too high. However, cash flow can change significantly over time, so here's how to estimate your future cash flow.
What is cash flow?
In a nutshell, cash flow means the money you're bringing in minus the money you're spending.
The money you're bringing in is usually pretty easy to figure out. Simply add up all of your sources of income, such as your wages from your job, any alimony or child support you receive, interest and dividends from your investments, and Social Security benefits, to name some of the more common sources.
The money flowing out can be a little trickier. Major, recurring expenses such as your mortgage or rent payment, auto loan, and utilities are tough to forget, but smaller expenses such as entertainment and dining out can be tough to accurately track, as can expenses that only occur once per year, such as property taxes. In order to calculate your precise cash flow, you need to account for each and every dollar flowing out of your wallet.
How does my cash flow change over time?
Your cash flow can naturally change over time as your earnings change, or you add (or eliminate) expenses. For example, you can reasonably expect your salary to go up by 2-3% per year throughout your career. And, after you retire, the money flowing in can change dramatically, and usually not for the better.
On the expense side of things, mortgage payments stay the same for the life of the loan, as long as you have a fixed interest rate, but rent tends to go up over time. Inflation naturally causes many expenses to rise over time, such as groceries, child care costs, and travel expenses. Other costs such as property taxes, insurances, and gasoline can go up or down from year to year.
Projecting your future cash flow
As I mentioned earlier, it can be tough to account for all of your expenses, so a cash flow calculator can make it easier. And, if you have a good idea of how your income and expenses might change over the next few years, here's a calculator that can help you project your future cash flow.
A few notes about the calculator:
- For reference, the historical average inflation rate is about 3%. So, it's reasonable to expect costs like groceries to increase by this amount.
- I also recommend using a percentage around this for variable expenses such as taxes and insurance costs. These may stay the same, or even go down, but it's better to err on the side of caution.
- Speaking of caution, this calculator is only as good as the estimates you put in. Although it's impossible to accurately predict the future, be realistic. Estimating that your salary will increase by 10% every year indefinitely, while your expenses don't increase at all, is probably not reflective of reality.
- Also keep in mind that the further into the future you try to project your cash flow, the less accurate it's likely to be. In other words, you can probably use your current income and spending data to reasonably predict your cash flow next year, or even a couple of years into the future. 20 years from now, not so much. There are simply too many variables between now and then.
Just an estimate
While it can be useful for budgeting purposes, keep in mind that this calculator is just an estimate. After all, there is no way to know for sure how your salary will grow over the years, or how some of your bills will change. As I mentioned, expenses such as property taxes and insurance fluctuate from year-to-year, and often in an unpredictable way. Therefore, while this provides a good ballpark estimate of your future cash flow, it's a good idea to revisit this regularly to account for your actual life changes.