Understanding Personal Cash Flow

Understanding your personal cash flow is a key part of creating a budget.  This article offers an overview.

Calculating personal cash flow is becoming more and more common.  It is a fairly simple process, however, many people still have some difficulties, especially when trying to determine what should be counted and what should not be.

The concept of cash flow analysis is primarily related to business. As far back as the 1970s, the concept of cash flow statements has been an integral element of U.S.

Both lenders and investors use corporate cash flow statements to determine a company’s financial health.  This is part of Generally Accepted Accounting Practices that have been a part of the business world for decades.

While high net worth individuals have used cash flow analysis for a while, it is a fairly recent concept for others.  It has become popular because it is extremely helpful in figuring out where you are and what you can do to improve your financial position.

Although it may seem like common sense, many people never go to the trouble.  But calculating your cash flow can give you a better look at your current situation and help you make decisions that will help you reach your goals.

As using cash flow analysis for individuals has begun to increase in popularity there are more resources available to help you calculate your cash flow position.  If you Google “personal cash flow” you will get more than 26,000 results.  Many of these are free online resources.

A lot of the material online deals with corporate cash flow calculations which are significantly different than the calculations appropriate to most individuals. This can be confusing and misleading because corporate cash flow methodology is much more complicated and completely fails to take into account many factors that individuals must consider to get an accurate number.  In general, if you require help making your own cash flow assessments, it is strongly advised that you ensure the material you look at is concerned with personal cash flow calculations, not corporate ones.

You should also make sure that you are not looking at information on “projected” cash flow assessments.  This is where you look at what you project to make over a given period versus what you expect to spend and make your decisions based on this analysis.  This can be useful for a business, but is not as helpful for individuals.

Anyone familiar with the business world knows that even complex projections done by experts are often very “hit and miss” and projections are constantly being “revised” or actively changed. For a company trying to attract investors, this is a useful tool; for an individual it is not.

Using the cash flow tool properly works best for individuals.  Taking a guess where you will be in the future and making decisions based on this guess is not a good idea.

Personal cash flow analysis is a very helpful tool to help people determine where they are at and to help them make the right decisions to get where they want to be. As such, anyone interested in their financial position should take the time to carefully calculate their current cash flow position and their inflow to outflow ratio.

However, it is important to do this correctly and ensure that the data you consider is accurate, as choosing a future course of action on the basis of an incorrect assessment can lead to disaster.

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