Personal Cash Flow Basics

As a result of setting up a personal budget, you will identify ways to improve your cash flow. Your personal cash flow is the arithmetic difference of your cash inflows and cash outflows.

To calculate your personal cash flow, start by selecting a period for measuring your inflows and outflows. A month is the most common period used. Most of us pay major bills monthly. Almost all of us either get paid monthly, every two weeks, twice a month, or weekly. If you get paid more frequently than monthly, you can multiply by 2 (if paid either twice a month or every two weeks), or by 4 (if paid weekly), to approximate your cash inflows from a job on a monthly basis.

Next, add up your monthly cash inflows. Be sure to add other income that you receive in cash. Include only those cash inflows that are received on a regular basis. If you do not earn the income consistently, leave it out. Lottery winnings should be excluded, for example. Tax refunds should also be left off the worksheet.

Use your net income, which deducts retirement-plan contributions, income taxes, and Social Security taxes. Add up all cash inflows to calculate a subtotal. The following worksheet shows an example:

Next, calculate your cash outflows on a monthly basis. Add up your bills that you pay on a regular basis. (The example assumes that you pay your bills once a month.) At a minimum, your monthly bills include mortgage or rent payment, utilities, fuel and transportation expenses, and food. If you make other loan or credit card payments, add those to the outflows too.

Children's school and living expenses, on a monthly basis, should also be included. Add up all cash outflows to calculate a subtotal. The following worksheet shows an example:

Finally, subtract your cash outflows from your cash inflows. This difference is your personal net cash flow. In this example, personal cash flow is equal to $525 ($3,125-$2,600). This is money you can save and invest.

By calculating your personal cash flow, you can identify opportunities to save. You can improve your cash flow by either increasing your inflows or reducing your outflows.

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.