KEY TAKEAWAY: Your Cash Flow—the money coming in and going out each month—is a power tool you use to grow your Net Worth and achieve your financial goals. By understanding and tracking your Cash Flow, you can identify opportunities to increase income, decrease expenses, and allocate more money to work for you and your goals. Scroll down to the TAKE ACTION section for this week’s actionable steps.

Previously, we discussed the importance of knowing your financial starting point or Net Worth, and today we’re going to discuss another exciting financial topic which is your Cash Flow.

Yes, I am serious, it is exciting, and you know why?

Because it is a tool you use to achieve your financial goals and grow your net worth that YOU CONTROL.

After all, while there are other things that could increase your Net Worth, you don’t exactly have control over them.

Like inheriting money. You may. Or you may not.

Like winning the lottery. You may. Or you may not. (You probably will not; the odds are about one in 300 million.)

Like the stock market skyrocketing.

And although there are other things that can increase your Net Worth – like getting more education to increase your income, investing your money in something that will grow, managing your taxes effectively, or optimizing your well-being to lower healthcare costs – they ultimately relate back to your Cash Flow.

So let’s talk more about the exciting topic of Cash Flow and why it’s important to know yours.

What is Cash Flow?

Cash Flow is the movement of money in and out of your accounts each month:

• Cash Inflow = Income you earn or any money coming into your accounts (salary, refunds, alimony, investment income, such as interest, dividends, capital gains, and rental income)
• Cash Outflow = Money leaving your accounts or that is deducted from income (mortgage, credit cards, insurance, utilities, food, car payments, taxes, etc.). Savings can also be viewed as a cash outflow because, while you keep the money, in essence, you are “paying yourself” and investing in your future goals.

Your Net Cash Flow is your Cash Inflow minus your Cash Outflow.

Why is Cash Flow important?

Cash Flow is a key factor in determining if your Net Worth will grow, shrink or stay the same over time.

Think of your Net Worth like a bathtub and your Cash Flow like the faucet and the drain. Money flowing in is like water from the faucet, filling up your tub, while money flowing out is water going down the drain.

If more money comes in than goes out – Cash Inflow > Cash Outflow – you have a positive net cash flow. When you have positive cash flow, you can:

1. Use it to reduce a liability (e.g., pay down a loan), which will INCREASE your Net Worth
2. Use it to increase an asset (e.g., add to your savings), which will INCREASE your Net Worth
3. Spend it (e.g., use the money to buy some clothes or go on a weekend getaway), which will make NO CHANGE to your Net Worth

If more money goes out than comes in – Cash Inflow < Cash Outflow – then you have a negative net cash flow. When you have a negative Cash Flow, you can:

1. Manage it by increasing your income and/or reducing your expenses to cover the shortfall, which will make NO CHANGE to your Net Worth
2. Use an asset to fund the shortfall (e.g., use your savings), which will DECREASE your Net Worth
3. Create or add to an existing liability (e.g., use your credit card or take out a loan), which will DECREASE your Net Worth

Therefore, Cash flow is one of the levers you use to change your Net Worth and achieve your financial goals.

WHY TRACK CASH FLOW

Because Cash Flow is one of the power tools for achieving your goals, it is important to track it. Tracking your Cash Flow allows you to:

• Know how much money is coming in and going out
• See where the money is coming from and going to
• Highlight financial opportunities and obstacles
• Gain control of your cash flow
• Be intentional about using it to reach goals

In short, tracking your Cash Flow builds your awareness – the first step toward positive change in any area of our life – and gives you valuable information to take charge of your money and financial future.

HOW TO TRACK CASH FLOW

Step 1: Choose your tracking method.

For example, you can use an app, spreadsheet, or pencil and paper. Pick a system you’ll stick with. (On Wednesday, I’ll share my one-page Cash Flow Worksheet that you can use for tracking and planning; if you’re interested in getting it, upgrade here.) There are many applications available, so play around and see what works best for you.

Step 2: Gather data and calculate total Inflows. Get your gross income from all sources – paystubs, bank statements, investment accounts, etc. You want to know your gross income – your income before any deductions for taxes, insurance, 401(k) contributions, or similar – so be sure to add back any money that is taken out of your paycheck.

Step 3: Gather data and calculate total Outflows. Gather all of your expenses and money flowing out, including bill payments, taxes, savings contributions, debt payments, etc. Be sure to track your ATM withdrawals and what you are spending your cash on.

Consider categorizing expenses as non-discretionary (necessary spending and legal obligations like mortgage, insurance, credit card and loan minimums, taxes) vs discretionary (more flexible lifestyle spending, such as eating out). This helps identify areas to cut back if needed and can be a good time to reflect on what is adding to your quality of life or just adding stress.

Step 4: Calculate your Net Cash Flow. To do this, you take your Cash Inflow minus your Cash Outflow.

Continue to track your Cash Flow monthly or however often best supports your ability to work toward your goals.

FINAL THOUGHTS

Tracking your Cash Flow puts you in the driver’s seat with your money. It is the lever you can use to increase your Net Worth and achieve your financial goals. Therefore, if you don’t know your Cash Flow, start tracking it.

And even if the numbers don’t paint as favorable a picture as you would like them to, you are building awareness, and from that, you can create an action plan to move in the direction you desire. Awareness is the first step toward positive change, and that holds true, too, when it comes to your finances and achieving the financial future you want.

TAKE ACTION:

1. Choose your Cash Flow tracking method – a spreadsheet, app, notebook, or other system you’ll use consistently.
2. Gather your Inflow data and add up your total monthly income from all sources.
3. Gather your Outflow data and add up your total monthly expenses, categorizing them as non-discretionary or discretionary.
4. Subtract Outflows from Inflows to calculate your Net Cash Flow.
5. Review your Cash Flow and look for any opportunities to increase Inflows, decrease Outflows, and redirect more money to your key goals.

IMPORTANT: The information provided is for educational and informational purposes only. It is not intended to be a substitute for professional advice, diagnosis, or treatment. Always seek the advice of a qualified professional with any questions you may have regarding the topics discussed here as the topics discussed are based on general principles and may not be applicable to every individual. 

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