Cash is king here in NYC.
I can’t count the number of times that my wife and I went on dates to local restaurants only to find out that they were “cash only” establishments.
Back then I hardly carried cash. It was so unromantic to have to jet out the restaurant in search of the closest bank because I didn’t come prepared.
Out of all the personal finance concepts, this one gets the most people in trouble. With numerous transactions done online or with card, many people don’t use or carry cash much. However, a solid understanding of your personal cash flow is a key ingredient to your financial health. Finance gurus don’t go around saying “Cash is King” for nothing!
Personal Cash Flow is the movement of cash flowing in and out of your bank account. Typically, cash flow is measured at a specific point in time. Depending on the timing, your cash flow could fluctuate from one day to the next.
An Example of Cash Flow
Lets say you work a standard 9-5 and get paid bi-monthly, on the 1st and the 15th. You get $2000 take home pay each check. Your monthly inflow is $4000 for the month. Note that this amount will hit your account in the first half of the month. Towards the end of the month, your credit card bill of $2000 will be due. Assuming you pay off your credit card in full each month (which I highly recommend), you will have a cash out flow of $2000. Lastly, you end off the month by paying your rent which will be a $1500 cash outflow. You finish the month with a net cash inflow of $500.
Cash Flow Illustrated
It is All About Timing
When considering cash flow, timing is just as important as the amount of the flowing cash. In the above example, the cash came in the beginning of the month and went out at the end of the month. Pretty straight foward and predictable.
However, imagine if you got paid at the end of the month and your bills came due at the beginning of the month. See the below example.
All your cash is going out before you get paid for the month. Note the lag of more than 15 days between your last bill and your paycheck. If you did not have a buffer of $3500 in your checking account, you would be in serious trouble! This is where people get tripped up in their finances. They don’t know when the cash is coming and going. Living paycheck-to-paycheck in this type of situation is the worst thing you could do.
If you are reading this and don’t know what day of the month your monthly bills come due, stop reading this and create a cash flow schedule today! You will thank me later.
To create a cash flow schedule, you will need the days of the month you get paid and the days you pay your bills. The easy part is charting out the days. The hard part is nailing down all the due dates for your bills and loans.
A Great Tool to Track Cash Flow and Get Control of Your Cash
I used to manually track my cashflow through excel. But in the name of efficiency I looked for other alternatives. Now, I currently use a website/app called to track my cash flow. Personal Capital has a full suite of tools to manage your finances and it is FREE! From budgeting to investing, they have everything covered. If all this is foreign to you, don’t worry, I will explain more. The way it works is that the site/app links your bank and credit/student loan accounts (and investment accounts if you have them) into one central location. Basically, it allows you see all of your financial info in one place.
Mint.com was one of the first companies to do this. However, since then, other companies have jumped in the game and turned the notch up a bit. Personal Capital is one of those companies. It is one of the best apps out now in terms of affordability (100% FREE) and precision of categorizing your spending.
Why Understanding Your Cash Flow is Important
Controlling your cash flow is important. If your monthly inflow is more than your outflow, then you are consistently building wealth. But, if the inflow is less than the outflow, you are possibly building your debt load. Negative cash flow silently eats away at your finances because most people don’t track it.
If you are living close to the financial edge, it is especially important to know your cash flow. For most people, our bills are usually lumped together. The example above shows a huge cash outflow at the end of the month while there are inflows in the beginning and middle of the month. Sometimes people get their bill schedule mixed up. As result, they will have monthly bills coming due before they get their paycheck for the month.
Months of Cash on Hand
Unfortunately, many Americans are not able to pay their bills each month. If you did not have enough cash to cover living expenses and loan payments, you would be in default. String many months together of this and you will have creditors knocking on your door.
If you didn’t get paid this month, could you cover your expenses?
Businesses keep an eye on their cash level as well. They call this “Days of Cash on Hand”. It is typically this because it is a metric that measures how long (days) could a business operate without revenue or an inflow of cash. From a personal finance perspective, I would call it “Months of Cash on Hand”. It is the measure of how many months of living expenses you could cover if you did not get paid. Other finance experts call it an emergency fund.
Either way, you need some “just in case” money in the bank.
Develop a Cash Buffer
Priority number one, if you find yourself in a paycheck-to-paycheck situation, is to develop a cash buffer. I would say, consistent with other personal finance experts, that you should build your cash buffer before working on your loans. Once you hit $1000 in your account, then you can start knocking out your debt.
Once you have that settled, you won’t have to be anxious about getting paid on time each month. Most likely you will get paid the same time you always do.
But you never know.
Do you keep track of your cash flow? Let me know in the comment section.