One of the financial activities that my wife and I decided to start doing this year was to measure our cash flow on a monthly basis in order to determine if we were spending more or less than our income. I believe the ideal way to monitor your finances is to keep track of every single financial transaction you make during the month. At month end you should be able to reconcile all your money coming in with money going out and then you can analyze where all your money has gone.
The only problem with that method is that it’s a lot of work to keep track of every single dollar you spend and we decided not to bother with that kind of detail.
What we decided to do instead is just do a much simpler calculation to figure out our net cash flow for the month. From this we can calculate the total amount we spent during the month and how much we saved.
The calculation is as follows:
1. Cash saved during the month = Cash Position at beginning of month minus cash position at beginning of last month.
2. Total money spent = total income during the month minus cash saved (from calc 1)
Note that the Cash Position is the net total of all your bank accounts, credit cards, and line-of-credits. It’s not important to do this at the beginning of the month but you should pick a time in the month that is consistent month to month. The first of the month works for me because I get paid at the end of the month and no withdrawals are made before the first of the month. It’s important to try to do this type of analysis over at least three months because of the normal variation in monthly spending.
This calculation tells you how much you saved and spent but no details on what the money was spent on. To try to fill in the gaps a bit, the next step I do is to look at our bill payments in our checking account as well as all charges on the visa statement and enter those entries into a spreadsheet which allows us to quickly see where about 80%+ of our money is spent.
I like this modified calculation because it’s fairly easy to do and gives us a lot of important information about our finances. We can always keep track of every detail if we feel the need to cut back a bit and need to know what can be cut, but until that time, this method will do.
An example calculation:
On April 1, Sue has $1000.00 in her bank account and owes visa $80.00.
On Mayl 1, Sue has $1250.00 in her bank account and owes visa $160.00.
Sue has a net income of $3500.00 per month.
We’ll calculate for the month of April.
1. Cash saved during April = ($1250 – $160) – ($1000 – $80) = $170
2. Total spending during April
= $3500 – $170 = $3330.00
Now this method is only a measurement of your cash flow and the resulting information needs to be further analyzed to determine if you are on track for your financial plans.
If you are looking for another budgeting program then check out my You Need A Budget Review.