While the savviest CEOs and bankers understand complex financial concepts that would confound most of us, there’s one critical concept they use that we can all get our heads around: cash flow. Cash flow is, in short, all the money (the cash) moving in and out (the flow) of a business - or household - over a given period.
Why is it so important? It allows a business to operate, and without adequate cash on hand, well, a business can go bust, and quickly. The same principal applies to your own finances. Whether working or retired, you need enough cash coming in, and a little less going out, over the course of a month. This allows you to cover your costs, and then some, so you can live confidently now and plan for the future.
Move the balance in your favor
Most of us monitor our bank balances regularly. Examining your cash flow balance is just as important. You may be earning a high income or a low one. You may be a woman balancing family and work obligations. You may be a member of the LGBTQ community with unique family and estate planning needs. But as far as cash flow goes, you’ll land in one of three types:
- Neutral – Your income is roughly equivalent to your spending and you’re living from paycheck to paycheck, which makes you vulnerable to unexpected expenses and unable to save money. The Day-to-Day Decision-Makers (15 percent of whom earn over $350,000 a year) may find themselves here.
- Negative – Your regular expenses exceed your take-home pay. This is a high-stress scenario. You’re probably putting more on credit cards than you’d like and may be paying bills late. The Ambitious Spenders among us may recognize this scenario.
- Positive – Because your income exceeds your spending, you can live confidently, saving money for goals (education, buying a house, retirement) and the occasional splurge. This tends to be where Confident Planners land, and we can all get here based on adopting model behaviors such as having a written financial plan and living within your means.
The first step to establishing positive cash flow is to evaluate how much money you have coming in and going out each month. A quick way to do it is take a look at your bank statement, tally your credits (the inflow) in one column, and debits (the outflow) in another column. Hint: you ideally want the credits to be greater than the debits.
Your working capital
To complement your cash flow, you need working capital. Sometimes you need a little more money than your monthly cash flow allows. Maybe your car broke down. Maybe you lost your job. Whatever the case, to survive a major disruption to your income, most experts recommend you set aside enough savings to handle six months’ worth of expenses.
In a recent survey, Americans identified building savings as one of their top priorities. Yet, 69 percent reported having less than $1,000 put aside. That leaves many unprepared to deal with unexpected life events, both negative and positive, and could lead to using retirement savings as an emergency fund. This is a big no-no.
Retirement and cash flow
What about cash flow for the future? Financial experts recommend channeling a minimum of 15 to 20 percent of your gross income into retirement savings. You can estimate your total retirement savings needs here and even break down your monthly expenses – remember we’re thinking cash flow – here. One caution: don’t lock up all your extra money in retirement savings
Once more, it all comes back to planning and living within your means, two essential traits of the financially and emotionally confident. So have an honest look at your finances, see where you need to make some adjustments, and plan for the future. And, of course, if it all starts to feel a little too much, financial professionals are there to help you get into the flow of financial and emotional well-being.
Brought to you by The Guardian Network © 2017. The Guardian Life Insurance Company of America®, New York, NY