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Understanding Your Cash Flow

Managing Your Personal Finances

A lot of people think that the concept of “managing cash flow” only applies to businesses. This isn’t true. Managing personal finances is incredibly important and a big part of this is understanding and managing your cash flow.

The basics of managing your personal finances are as follows:

• Know how much you earn
• Know how much you spend
• Know how much debt you have
• Track everything
• Have a plan

Knowing How Much You Earn

This sounds simple, but many people aren’t aware of exactly how much they earn. Even those who are aware may not be quite sure of exactly when they earn their money. For example, are you paid monthly? Bimonthly? Every two weeks? This matters for budgeting purposes. You’ll need to understand exactly when money is coming in in order to properly manage your cash flow.

You’ll also want to separate your regular income from any bonuses. For example, if you get bonuses or tips at your job, keep this total separate from your standard salary. Why? Because these bonuses and tips likely fluctuate, so you can’t count on them to help you afford regular monthly expenses.

Know How Much You Spend

This is another area where many people don’t have all of the information they need. Most people spend with a general idea of a budget, but they typically don’t know the exact amounts. This is a mistake. In order to fix this mistake, for at least one month, write down absolutely everything that you spend money on. This includes small purchases like a cup of coffee all the way up to large expenses like your rent or mortgage payment. At the end of the month, add it all up.

You might be surprised by the number.

Know Your Debt

If you have debt, it’s important to understand it. Write down all of your debts, including information on how much you owe, how often you are expected to make payments, the amount of interest that you pay and any other relevant facts.

Most people aren’t aware of the particulars of their debt. This prevents them from being able to prioritize debt payments. Prioritizing your debt is an excellent way to save money on interest, reduce costs and eliminate debt more quickly.

Track Everything

As mentioned earlier, tracking your spending is a crucial part of managing your personal finances. Once you’ve figured out all of your totals (income, spending and debt) write all of them down. Every time you spend money or pay down debt, take note of it. This may seem tedious, but keeping accurate records is a crucial part of managing cash flow.

There are a number of apps out there for most popular smart phones that can help you with tracking, but you can choose to use a spreadsheet program on your computer or a good old pen and paper if that works better for you. Choose a tracking method that is easy for you so that you’ll be more likely to actually do it.

Create a Plan

Once you’re tracking everything, you can come up with a plan to optimize your situation. This will allow you to save money by spending less and repaying debt more quickly. Ultimately, having more money left over at the end of the month is the objective of managing your personal finances.

You can start by looking for places to cut. Review your list of expenses. Can you see anything that you could reduce or get rid of? Maybe you’re spending money on a gym membership that you don’t use or you’re paying for a variety of cable channels that you don’t watch. If that’s the case, you might want to consider cutting these expenses. Are you eating out at restaurants often? Cutting back on this spending and cooking at home more frequently can save you some additional money. Look for places in your spending where you can cut and consider making these cuts. Where you can cut will depend on your personal situation.
You’ll also want to look at your debt and come up with a plan for reducing the amount of interest that you pay. Depending on your circumstances, you may be able to consolidate your debt in order to save money on interest. You can also prioritize your debt and pay down the debts with the highest interest rates first, which will save you money.

Overall, managing your personal finances isn’t complicated. It doesn’t require superior math skills or knowledge of economics. What it does require is tracking, organization and budgeting, which anyone can do with a bit of effort and dedication.