Effectively managing your income and expenses is the biggest factor on your path to reaching your financial goals. Most wealth is built over time through the simple process of spending less than you make, and investing the difference. As a general rule, your focus should be on increasing your income and decreasing your expenses.
We previously looked at how your net worth statement marks your current financial position. Your cash flow statement is your roadmap to reaching your goals. Some take the scenic route, while others are in a hurry to get there as quickly as possible.
Take the time, if you haven’t done so already, to list all of your income and expenses. If you’ve already gone through the process, review your numbers for accuracy (things can change over time). All I’m asking for you to do here, is see where your money is going. I’m not (yet) asking you to make any changes to your spending. However, feel free to reduce expenses if the exercise illuminates areas you know you should cut back on. Otherwise, your cash flow statement should list where your money is currently coming in from and where it’s currently going.
The 4 Components to Your Cash Flow Statement
Income from side jobs
Cell phone/ Cable/ Internet Bills
Taxes (don't worry about if you have taxes automatically taken out of your paycheck)
*Be sure to include expenses that aren’t monthly (car registration, taxes, etc.)
Giving - You may view this as an optional category, but I highly encourage you to make it a part of your budget.
- Financial gifts to charity, non-profit of your church
Savings and Investments
Workplace Retirement Plan contributions (401(k), 403(b), PERA, TSP, etc.)
IRA contributions (Roth or Traditional)
Taxable investments (Brokerage account)
Emergency Savings Account
Savings for a major purchase (car, home, vacation)
If you don’t operate off of a cash flow plan, it is very easy to spend more than you realize. Once you have built a net worth statement and cash flow statement, you will have a very clear idea of where you stand. Most financial advice out there would immediately start prescribing solutions once they see the two financial statements. Before jumping in with any solutions, you need to decide what you want your life to look like.