Know Your Cash Flow – Not a Budget

So far this week I’ve talked about the foundation to financial freedom, and detailed how calculating your net worth is the best starting point. Now I’ll talk about pulling together your statement of cash flows.

What is a statement of cash flow, you might be wondering? It’s a concept companies use to do something simple: track all cash coming in and all cash going out. The concept is widely used in accounting, and if you’ve ever read a companies financial statement you’ve seen it in there.

For a company, this can be an important metric to see how they’re managing their cash. Are they using more than they’re taking in? Generating cash is an important part of a healthy business – and as chief officers of your financial household, it’s important to you.

The Financial Pyramid will help you reach financial freedom
Still getting to know yourself, but now focusing on your cash flow

Why Not a Budget?

You might be surprised that this step isn’t “create a budget”. After all, most financial experts recommend creating a budget as one of the first steps to pulling together a comprehensive financial plan. Personally, I’ve found a budget to not be useful unless you already know what’s going on in your financial life. If you’ve been living paycheck to paycheck, or haven’t been able to save up as much as you might like, then you need to first track where your moneys going. You’re likely going to be surprised at the results.

The other reason I put “know your cash flow” here is to help with the plan in the next tier to optimize expenses. Once you have the details of where your money’s currently going, you can begin to tackle getting your monthly costs down and savings/investments up. You’ll also know if you’re in the black-or the red-every month

One Month

All I ask for this to start is one month of tracking your expenses. I use my debit card for everything, so tracking is relatively easy for me. How do I do it? Well there are some amazing tools out there but I use Excel. I’ve tried the big financial trackers in the past (Mint, Personal Capital) but I keep going back to Excel. I track everything coming in and going out from my checking account, and use a pivot table to create a chart where I can drill-down into each category of expenses.

Side note – I decided to give Personal Capital another shot just to see if it’s changed since I last used it a few years ago. I’ll report back on my findings later!

Why one month? Over the course of a month you’ll encounter most of your major expenses. Phone bills, cable bills, monthly subscriptions, groceries, household items, fees, etc. – you’ll run into all of those over the course of a month. There are some expenses you won’t encounter, which you’ll need to think about after your month of tracking is up. Those are usually quarterly or annual expenses, such as:

  • Insurance (if you pay once per year)
  • Garbage bills (mine is quarterly)
  • Car registration and taxes
  • Property taxes (if it’s not taken care of by the mortgage company)
  • Quarterly taxes (if you’re self employed)

There are also irregular expenses, like car repairs, which you might not encounter in a typical month. That’s OK – when we optimize expenses and have our emergency plan in place, you’ll be able to take care of those things when they come along.

Is Your Spending Killing Your Dreams?

Once the month is done, you’ll want to check how much you’ve spent throughout the month. This sounds boring, but it’s necessary, because once you complete this step you’ll be able to take steps to make sure how you’re spending your money is – or isn’t – bringing you closer to your dreams.

The key to achieving your dreams is making sure your spending is supporting them.

  • Do you dream of taking an around the world trip, but you’re spending $200 on cable and your vacation fund is empty?
  • Do you see no way to help with college for your kids, but you have a monthly car payment of $350?
  • Do you want to shift into less stressful work, but you’re spending every dime you make?
  • Are you looking to retire, but your 401k languishes while your grocery bill climbs?
  • Do you have a dream of owning a house one day, but you’re spending $500 a month on eating out-and nothing toward a down payment?

For now, we’re just tracking. No judgement, no changes, just seeing a black and white version of where our money’s going. In order to tune our expenses to align them with our dreams, we need to know where we are today.

Does This Really Work?

I can answer with an unequivocal YES.

Four and a half years ago after my husband almost died from septic shock, I found our family in a bad financial situation. Our emergency fund-and plan-had saved us from the brink of disaster. But the financial damage was done. Emergency funds were gone, we still had “normal” debt of a car loan and my graduate student loans, and we were living on one income. I had cut out all my usual saving and investment just to pay the increases in the monthly bills.

Closely monitoring every dollar going in and going out became a matter of survival. I didn’t want to pile credit card debt on top of this mess-the last thing I needed to worry about was more debt. So I tracked every dollar coming in and going out to make sure we were at least breaking even. Every time I recorded an expense I would think if this is something I really needed. Was this a need or a want? Was there a way to cut this expense? Could I refinance this debt?

You see, every dollar spent was a dollar that I needed to ensure the stability of my family. So I optimized my expenses (more about that soon) and continued to track everything for over a year. Once the debt was totally gone and emergency funds were back in place (in under a year!) I was able to ease up and set everything on autopilot again.

But not anymore. As I talked about on Wednesday, I have some very aggressive savings goals for the year. It’s going to take saving over half of my pre-tax salary to achieve them-and that’s on one income (mine) with three young kids. The only way to do that is to get very focused on cutting expenses to the core and increasing income.

So at the start of the month I fired up my trusty Excel and started tracking. At the end of the month I’ll report out on what I’ve found, and what my “to-dos” are to cutting my expenses.

Do you track your cash flow? Are you using an app/website, or are you going old-school on paper or Excel? Have you found any surprises in the numbers? Let me know in the comments.

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12 thoughts on “Know Your Cash Flow – Not a Budget

  1. Tracking spending is SO important. It’s crazy how many people don’t know where their money is going. I know to pretty much the exact decimal, ha! That’s probably too hands on 😉
    My husband sat down last night and worked out his cash flow. He was very surprised!

  2. We began with YNAB this year. Although I said we were budgeting (and we sort-of were), we were actually tracking our spending in order to see how much we need to budget. Until we tracked our spending, I didn’t know whether we should be budgeting $10/month for electricity, or $150/month (unsurprisingly, it was the latter).

    Now we have a good, strong idea of what our fixed and discretionary costs are, we can look at real, actual budgeting where we set ourselves a goal to reduce costs, then make sure we stay within that goal (= budgeting!)

    1. That’s exactly why tracking has to come first! Otherwise you’re just guessing what the budget should be. It can be surprising just how much small expenses add up to over the course of a month!

  3. I track mainly our cash flow at this point. I did use a budget when I was first starting to manage my finances and plan for paying off debt, but a big part of that was tracking income in versus expenses out. Now that my financial house is more in order, I don’t really sweat the small details too much.

    I was using Excel at the beginning, but now I’m mainly using Mint to keep track of income and expenses.

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