Positive Cash Flow is King!

Positive Cash Flow is King!

July 09, 2020

How to Budget and Get a Handle on Your Expenses.

“We must consult our means rather than our wishes.”—George Washington.

Money is a tool that we use to get things that we want and to live a certain way. It is often difficult to handle money.

I remember after I graduated from college and was making around $20k per year that I racked up $6,239 in credit card debt. When I realized that I wasn’t going to be climbing the ladder that fast and that this was an incredible amount of debt for the money I was making, I buckled down and made it a priority to pay off the debt. Every time I had an extra $20 I would send it to Visa and I slowly climbed out of debt promising to never lose control over my spending again. Over $6k in debt and I had nothing to show for it.

The first thing I did to get control over my spending and financial health, was to review my income and how much I was spending. Truth be told, budgeting can be like dieting and I don’t like either, but sometimes we need to take a look in the mirror, see our flaws and create a game plan going forward. Budgeting doesn’t mean giving up things, it means making better choices today, so that we can make today and tomorrow better.

For the Cash Flow exercise, gather the following documents:

• Current paystubs for jobs that you have.
• A list of all places where you make income to live off of—rentals, businesses, dividends, second jobs. . .
• A list of your living expenses for the last 3 months—how much does it cost you each month to live?

Another way to get a handle on your income, you can review your tax return from the prior year. If you expect your income to be the same, this is probably a good overall number to use. The other way to do this is to review your paycheck and the money that gets deposited into your account each month from your income. After taxes, how much money do you make? If you normally owe income taxes at the end of each year, that expense needs to be accounted for. If you get money back each year from taxes then that becomes additional income. Do you own rental real estate or a business that you get additional income from? Add all of these additional sources to your overall income. It is good to review your income each year as tax laws change and you may have gotten a bonus or a raise.

To determine your expenses, get together at least three months of statements from your bank and for any credit cards that you have. You want to account for every expense that you had over the last three months. Taking an average over three months will give you a good sense of what you spend each month and then you can calculate it out to the year. Following is a worksheet that you can use:

Expense Worksheet

Once you have this completed calculate what your annual expenses are by multiplying monthly expenses by twelve. . .

Wondering how you compare to the average American household?

Average US Household Expenses

The difference between the gross income of approximately $75,000 per household and the $59,975 is due to federal, state and local taxes.

So, let’s see where you stand after doing these calculations:

If your cash flow is negative. Review your income to see how much you have every month. Cut expenses where you can. Based on the math of your cash flow after cutting expenses, if you still have negative cash flow, consider making changes to your biggest expenses (housing. . ) and think about getting a second job. Review your expenses for needs vs. wants. (e.g. expensive hand bags are a want and not a need.) You want to have positive cash flow so that you can start building an emergency fund and eventually an investment account. When choosing how you spend money, review your wishes, likes, wants and needs. Once your needs are covered and you have positive cash flow you can go from there. Living within your means is more fun that being stressed out about money.

If your annual cash flow is positive, Congratulations! If it is negative, there is work to do so that you can live within your current income levels.
What we spend our money on can show what we most value in life. Many people find areas where they can cut expenses in doing this exercise. If there are expenditures that aren’t aligned with your values, get rid of them. Pay yourself first so that you can get ahead in the financial rat race.