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Cash Flow and Budgets



Need to create a budget?

Know Where You Are and Where You Want to Be

Before one can take even one meaningful step forward financially, one should define where they are currently at and should compare that current reality to a well stated and specifically defined set of personal financial goals and objectives. These personal goals and objectives should detail outcomes important enough to motivate your daily focus and action. A written statement of purpose can be a most helpful place to start in the process of defining specifically what is to be accomplished.

Know the Difference Between "Cash Flow" and a "Budget"

A cash flow statement simply determines how much income you have left over after all of your fixed and variable expenses. This statement is based upon one simple calculation:

Total Income - Total Expenses = Net Cash Flow

Such a simple analysis can be done annually, quarterly or monthly and is usually a monthly exercise when personal finances are concerned. It is simple enough to do on a napkin at lunch and is the starting point in defining your personal financial reality. Knowing this specific "net cash flow number" and whether it is a positive, negative or neutral (i.e. zero or "break even") figure is a critical step in the process of succeeding financially. Still, knowing whether you are in the black or the red does not exactly define where your money is being spent, does it?

Positive cash flow is the ideal and may allow for additional steps to save, invest or even to treat yourself to something within reach that you have deferred purchase on in times past.

Negative cash flow is generally an indication that you are living beyond your means and are likely incurring debt unless you have a benefactor (a parent or otherwise) that bridges the gap when one exists.

Neutral cash flow is very unlikely because the vast majority of people don't spend, to the penny, exactly what they earn. Ending up with a zero (a pure breakeven) when calculating cash flow would be a real anomoly.

Once one knows whether they have positive or negative cash flow, they can turn to the process of developing a defining budget.

A budget differs from cash flow statement because a budget both projects how you expect to allocate the cash flow and records how the cash flow was actually spent at the end of the month. Thus, the difference betwee "a budget projection" and "the actual figures" since it is likely that your spending pattern may not exactly match your projections at the beginning of the period.

It is important to note that maintaining a budget can influence spending decisions. It encourages the setting of financial goals and allows the goals to be compared with actual spending patterns so that occasional course corrections can be had before things get out of hand.

***Budgeting is also key before you borrow money (i.e. Student Loans, Automobile Loans etc.) because knowing what you really need or conversely, what you can really afford is a critical piece of information to know so that you can both minimize the amount of debt you incur and so that you can protect yourself against incurring an ongoing payment amount that you lack the funds to service. Most, for example, that obtain a student loan will take all that they are able to qualify for without knowing precisely what amount they really need. More intelligent decisions will be made as you borrow, and the amount you will need to pay back in the process will be reduced if you know precisely what you legitimately need or can afford and refuse to borrow a penny more!!!***




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Last Updated: 5/24/21