Determine your Cash Flow - Part 1 Understanding Cash Flow By Mo2

What is cash flow?
Cash flow is the amount of money you have after all of your expenses, that's including taxes, have been paid for. So basically by analyzing your cash flow you can tell how financially healthy you really are. In order to increase your net worth (as discussed in the previous article here) you must have positive cash flow. Of course there are other ways of increasing your net worth, winning the lottery and inheritances are a couple of examples. But most of us aren't that lucky (unfortunate somewhat for the latter) therefore we have to understand cash flow and make sure we're afloat.

The Calculation of Cash Flow
Ok, so now that you know what cash flow is you need to find out what your cash flow is! This will take some effort but try to do your best to be as accurate as possible.

First put this simple formula into your head:
(All Income) - (All Expenses) = Cash Flow

Now you need to determine what sources of income you have.
Sources of income could be: Salary, Self-Employed, Rent, Gifts, Interest, Dividend, Capital Gains, Bonus, and pretty much anything that puts extra money in your pocket.
Now for the scary part.

Expenses: All taxes, food, clothing, automobile expenses, mortgage, rent, utilities, insurance, loans, credit card debt, line of credit, vacations, gifts, charity, tuition, entertainment, savings, and miscellaneous.

Obviously, some of these can be divided into more detailed sections. We all have different needs and thus we will have a different cash flow statement.

Your Financial Health
Now that you've gone through the tough part, pat yourself on the back! If you've done this much work you're showing to yourself that you want to improve your financial health. The Cash Flow statement isn't just about telling you how much ahead/behind your are your bills. It also makes some things obvious that weren't before. For example, I'm sure you didn't realize how much nail polish you used (I hope this isn't true). Or you might realize that you're going out to eat too often or buying too much clothes.

Gathering Data
Sometimes it's tough to determine your exact expense especially if you don't stay on top of all your spending and well know how hard this is. Try and gather whatever you can since accurate data will lead to more accurate cash flow statement. However, you just might not remember some figures and in that case guess. Try to inflate the amount a little so that you won't be shocked when you find out how much you were actually spending on those Twizzlers.

Determine your Cash Flow - Part 2 will deal with how to analyze and increase your cash flow.

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If you would like to comment on this article or anything on this website please feel free to e-mail Mo2. He can be reached at Mo2@Mo2Thinks.com. Thanks for visiting!