BudgetingManage Money Articles

Cash Flow Plan: A Simple Guide to Managing Your Money

In addition to tracking your income and expenses, creating a cash flow plan is essential for managing your personal finances effectively.

Effective cash flow management is fundamental to budgeting and achieving your financial goals.

By tracking your income and expenses, you can gain valuable insights into your spending habits, identify opportunities for saving and investment, and ultimately take control of your financial future.

In this guide, we’ll walk you through the essential steps to a cash flow plan.

What is Cash Flow?

Cash flow measures the money a person receives and spends. It is a movement of money based on income and expenses.

Cash flow is best understood with the following equation:

Cash Flow = Income (Money In) – Expenses (Money Out)

How to Calculate Cash Flow

Calculate your cash flow to determine how you’re managing your money.

Real cash flow management involves understanding where your money comes from, where it goes, and what choices are appropriate in achieving goals and living your best life.

Your cash flow includes:

  • Income – salary, bonus, hourly, self-employed, passive, or investment sources.
  • Expenses – costs such as rent, mortgage, and utilities; the bills come in every month

Step 1: List Monthly Income

List your income sources, including salaries, wages, bonuses, and other revenue.

Income SourcesAmount ($) per Month
Salary$4,500
Wages$2,000
Bonuses$500
Side Hustle$300
Investments$200
Rental Income$700
Other Income Sources$150
Total Income$8,350

Step 2: List Monthly Expenses

List all your monthly expenses, including fixed expenses like rent/mortgage, utilities, and loan payments, as well as variable expenses like groceries, transportation, entertainment, and discretionary spending.

Monthly ExpensesAmount ($) per Month
Rent/Mortgage$1,200
Utilities$200
Loan Payments$500
Groceries$400
Transportation$200
Entertainment$150
Dining Out$300
Shopping$250
Travel$100
Miscellaneous$150
Total Expenses$3,450

Step 3. Calculate Your Cash Flow Number

To calculate the cash flow, subtract the total expenses from the total income:

Total Income – Total Expenses = Net Cash Flow

$8,350 (Total Income) – $3,450 (Total Expenses) = $4,900 (Cash Flow)

CategoryAmount ($) per Month
Income:
Salary$4,500
Wages$2,000
Bonuses$500
Side Hustle$300
Investments$200
Rental Income$700
Other Income Sources$150
Total Income$8,350
Expenses:
Rent/Mortgage$1,200
Utilities$200
Loan Payments$500
Groceries$400
Transportation$200
Entertainment$150
Dining Out$300
Shopping$250
Travel$100
Miscellaneous$150
Total Expenses$3,450
Cash Flow$4,900

Step 4: Assess Your Cash Flow

Are you living at, below, or above your means?

Here’s a table illustrating what it means to calculate cash flow and whether someone is living at, below, or above their means:

DescriptionAmount ($)Interpretation
Total Monthly Income$8,350
Total Monthly Expenses$3,450
Cash Flow$4,900Negative: Living below means, accumulating debt
Total Monthly Income$8,350
Total Monthly Expenses$9,000
Cash Flow-$650Negative: Living below means, accumulating debt
Total Monthly Income$8,350
Total Monthly Expenses$8,350
Cash Flow$0Neutral: Living at means, income equals expenses

This table provides scenarios where total monthly income, total monthly expenses, and cash flow are calculated. Depending on whether cash flow is positive, negative, or neutral, it indicates whether someone is living above, below, or at their means, respectively.

Calculating your cash flow number helps determine whether you live below or above your means.

  • If your net cash flow is positive, you are doing well and have extra money to put towards your financial goals.
  • If your net cash flow is negative, it may be time to cut expenses, increase income, or both.

The following table illustrates the meaning of positive, negative, and neutral cash flow.

Cash FlowMeaning
PositiveIncome exceeds expenses, resulting in a surplus of funds. This indicates living above one’s means, with potential for savings or investments.
NegativeExpenses exceed income, resulting in a deficit of funds. This indicates living below one’s means, potentially accumulating debt or relying on savings to cover expenses.
NeutralIncome equals expenses, resulting in a balance between inflows and outflows. This indicates living within one’s means, with no surplus or deficit.

This table summarizes the implications of positive, negative, and neutral cash flow on an individual’s financial situation.

Step 5: Identify Opportunities

Analyze your spending patterns to identify areas where you can cut costs and save money.

Step 6: Project Your Cash Flow

Based on your income and expenses, project your cash flow (similar to creating a budget) that outlines your expected income and allocates funds to essential expenses, savings, debt repayment, and discretionary spending.

ExpensesMonthly Budget Allocation ($)
Housing$1,200
Utilities$200
Groceries$400
Transportation$200
Loan Payments$500
Savings$800
Debt Repayment$300
Insurance$150
Healthcare$100
Retirement Contributions$500
Entertainment$200
Dining Out$150
Miscellaneous$150
Total Monthly Budget$4,250

This table provides a detailed budget allocation based on income and expenses.

Step 7: Allocate Income to Goals

Allocate a portion of your income towards your financial goals.

  • Set up automatic transfers to savings accounts or investment accounts for consistency.
  • If you have outstanding debt, allocate additional funds towards debt repayment to accelerate payoff and reduce interest costs.
Savings and Investment GoalsMonthly Allocation ($)
Emergency Fund$500
Retirement Savings$800
Education Fund$200
Vacation Fund$100
Home Down Payment$300
Investment Portfolio$600
Total Monthly Allocation$2,500

This table illustrates allocating a portion of income towards savings and investment goals.

Step 8: Track Your Spending

Once you’ve created a cash flow plan, it’s crucial to monitor your actual income and expenses regularly and compare them against your projected cash flow. Review your bank statements, credit card statements, and receipts regularly to track your spending and ensure it aligns with your cash flow plan.

Identify discrepancies, overspending, or areas for improvement. Use a budgeting app, spreadsheet, or pen and paper to clearly understand where your money is going.

Step 9: Recalculate and Adjust

Recalculate your cash flow number and compare it against your plan to identify discrepancies. This will help you fine-tune your plan.

  • If you find that you’re consistently overspending in certain categories, reassess your plan and identify areas where you can cut back or reallocate funds.
  • Adjust as needed to accommodate changing circumstances, such as fluctuating income or unexpected expenses.
  • Stay disciplined and committed to sticking to your budget, but also be flexible enough to adapt to unforeseen changes.

Step 10: Celebrate Progress

Celebrate your progress and achievements along the way. Whether it’s reaching a savings milestone, paying off a debt, or sticking to your cash flow plan consistently, take time to acknowledge your accomplishments and stay motivated on your financial journey.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *