How to Create a Personal Cash Flow Statement
You’ve heard the saying “Cash is King,” and this old adage implores you to recognize the importance for individuals to track the inflow and outflow of their cash, just like a business does, to assist you in making educated financial decisions (and yes I’m including digital cash, fin-tech payment systems, your stored-balance cards, investments and even cryptocurrencies when referring to “cash”).
There are two main ways for individuals to track cash, and I will be outlining them in a series of posts to really dig into the details of each. Then, I will wrap up the three-part series with a post about how you can use these methods to build a really solid financial life that you love.
Sound good? Great! Let’s dig in.
So, What Is A Personal Cash Flow Statement?
A personal cash flow statement measures your cash inflows and outflows in order to show your net cash flow for a specific period of time. Cash inflows generally include the following:
- Salaries
- Interest from savings accounts
- Dividends from investments
- Capital gains from the sale of financial securities like stocks and bonds
Cash inflow can also include money received from the sale of assets like houses or cars. Essentially, your cash inflow consists of anything that brings in money.
Cash outflow represents all expenses and purchases, regardless of size. Cash outflows include the following types of costs:
- Rent or mortgage payments
- Utility bills
- Groceries
- Gas
- Furnishings
- Vehicles
- Entertainment (books, movie tickets, restaurant meals, etc.)
The purpose of determining your cash inflows and outflows is to find your net cash flow. Your net cash flow is simply the result of subtracting your outflow from your inflow.
Positive net cash flow means you brought in or earned more than you spent and that you have some money left over from that period. On the other hand, a negative net cash flow shows that you spent more money than you brought in.
You may be thinking, “Ellen, that sounds a lot like a budget” and in many ways, it is. However, a budget is prepared ahead of time, to help dictate where your money will go. A cash flow statement is prepared after the fact, to show where your money went. Many successful people I work with are afraid of spending for fear of incurring a negative cash flow in any given period, but sometimes that is ok. Think of it as a life budget with intent. Documenting your cash flows and preparing a cash flow statement supports your financial freedom, and is the foundation that helps you understand your financial picture and be prepared for the next step – the personal balance sheet.
Your task until my next post is to collect your inflows and outflows and put them onto a spreadsheet. Start with three months to get a basic picture. If you’re really ambitious, a year would give you a more accurate picture. Either option will prepare you to move on to step 2 when the next post comes out in February.
Have a question before then? Let’s chat.
