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This post comes from Miranda Marquit at our partner site Quizzle.com.
A lot of the time, when we consider income and expenses, we think mainly in terms of how much is coming and how much is going out. When we struggle with finances, we assume that we need more money, or that we need to spend less. While this might be true, just looking at your financial situation in terms of income minus expenses does you a disservice.
The reality is more nuanced, and it involves timing as well as sheer numbers. When looking at your financial situation, you need to understand your cash flow.
The Basics of Cash Flow
Cash flow is the way money moves through your own personal economy. Cash flow takes a look at the money that comes in, and the money that goes out, and also considers where it is moved to — and when it all these changes happen.
Paying attention to your cash flow is about more than just understanding that you will have an income of $4, 000 this month and expenses totaling $3, 500. Rather, cash flow takes a look at when all of this will happen as well. If you are paid on the 3rd and the 18th of each month, that should factor into your calculations, since you will get $2, 000 on the 3rd, and it will have to cover all of your expenses until you are paid another $2, 000 on the 18th.
The timing of your bills matters, as well as the timing of your income. I divide up my expenses so that they match up with my expected income. This is a little more difficult for me, since I have a variable income, and sometimes my freelance clients pay late. In these cases, timing becomes especially important. The fact that it takes three to four business days for my money to transfer from PayPal to my bank account matters. In fact, one day can make the difference between whether or not there is enough money in my “bills” account to pay the mortgage.
Know Where Your Money Should Be — And When It Should Be There
When you plan your finances, make sure you understand the “when” behind your money, as well as the how much. Timing matters. If you expect to receive money on the 5th of the month, and you arrange to have your car loan paid on the 6th of the month, you might be cutting it close. What if the money isn’t there? What if you you had an unexpected expense or if a clerical error means that your paycheck is smaller than you expected?
It can make sense to schedule bill payments (if you can) with a little wiggle room. It also helps to have a backup plan so that you can implement alternatives if your cash flow gets a little off track.
Plan your finances, but do so with the bigger picture in mind. Consider diagraming your cash flow so you have a visual idea of where your money goes when once you earn it. Make a flowchart showing the money that goes to savings, paying bills, and other expenses, as well as identifying the dates that all of this happens. Once you understand how money is moving through your personal economy, you can make tweaks so that you have what you need when you need it.