Cash flow is a product of the relationship between your income and your expenses. There are many people out there who are earning healthy salaries, but whose expenses eat much of that up. Thus, as long as you can control your expenses, you can actually earn considerably less than your neighbors, but have better cash flow.
Ultimately, if you’re looking to improve your cash flow situation, you need to make more money or reduce your expenses. Today, I’m going to focus on developing a system to better track and understand your cash flow.
Choose your budgeting tools
The first step is to identify the best tool for monitoring and managing your monthly cash flow. While you might not be able to find the perfect system, you’ll undoubtedly be able to find one that works for your needs and goals. I’ve tried a few myself, and have found some really good ones.
I use Mint on a regular basis to track of our spending habits. I’ve told my family about using this tool numerous times, and it’s helped those who have tried it.
Pro: I absolutely love receiving an e-mail on Fridays with a summary of what we’ve spent, and our current progress relative to our budget.
Con: While Mint does a decent job of categorizing spending, it can’t separate things like grocery and electronic purchases at Walmart. I also can’t add one of the credit cards that we have.
Quicken is one of the most popular financial programs, and for good reason. I use this for our retirement accounts, my home business accounts, and for our overall net worth updates.
Pro: Quicken has a ton of features and capabilities, so you’ll be able to do just about anything you need.
Con: It may too feature-rich, and distract (or overwhelm) users who are looking for only the basics. Also, it’s a local software solution, so you won’t have access to your data online.
Pro: PocketSmith offers a calendar view that can help you see how quickly small expenses can add up. PocketSmith also has a forecasting tool that is very useful.
Con: Some people may want to just see the big picture, and the granularity of the daily view might just get in the way.
You Need a Budget
After reading different reviews of YNAB, I decided to try out the free trial version myself to get a better idea of how it works.
Pro: YNAB had a lot of great built-in tools, such as the debt snowball. Installing the program was easy, and once I got my accounts imported, it worked like a charm. They also offer free, live coaching to help you get up to speed, and they also have great user forums.
Con: Some will find the price ($59.95) a bit much after the free seven day trial. The upside is that it’s a good program for those looking to manage their money. For those scared away due to price, I’d download the trial and play around with it. I think YNAB could work for many households.
Your own Excel or Google spreadsheet
We use Google Docs and share a spreadsheet with our monthly budget plan. It started out as a simple spreadsheet when we got married, and it has grown more complex over time.
Pro: You have complete control of how you want to manage and handle your budget. I love how you can share your document with one another, keeping everyone on the same page. Also, it’s free!
Con: Manual updates… You have to stay on top of every expense and paycheck to keep it up-to-date. This can get tedious, and one mistake can leave you frustrated as you hunt for it.
Preparing cash flow projections
After you’ve established a pattern for your income and expenses, you can start setting goals and making financial projections. Here are some examples:
- Replacing a car: All cars break down eventually, so start planning to eventually replace your current car.
- Expanding your family: Having kids can be a huge blessing, but they’re also an enormous expense. Before making a big decision, figure out what impact it will have on your budget.
- Dream vacation: You should already have “regular” vacations built into your budget, but what about a dream vacation. It could be for a month overseas for the entire family, or a volunteer project you want to completely focus on without the constraints of your work schedule, or… Whatever. Start planning now.
By planning ahead and directing your free cash flow into a dedicated high yield savings account (or investment account, depending on your time horizaon), you can make your dreams a reality. The worst case scenario is that you’ll have extra money tucked away. That’s better than having a huge event with nothing to protect you financially.
Have you used any of the methods or tools listed above to track your cash flow? Or perhaps you’re using an approach that I didn’t cover? What steps are you taking to improve your cash flow?