Expenses & Cash Flow

Though they may not be fun to create, budgets are a necessary evil if you want to get your spending under control. And the key to successful budgeting is spending less than you earn.

A cash flow analysis is the first step in determining whether or not your spending is “out of control” and if you need to create a budget to rein it in. A successful budget will give you greater control of your money and help keep you on track to reaching your financial goals.

Evaluate Your Spending

Your cash flow analysis shows how you spend money on a daily and monthly basis. To determine your cash flow, you should:

Track your spending for several weeks. Record every dime you spend–both how much and what it was for. Don’t just record withdrawals for cash–record what that cash was spent on. You should be able to account for everything. Try using Mint to get you started.
Gather receipts. Organize the receipts for all of the expenses you’ve been tracking. Be sure to include your credit card bills, any online statements and checkbook register (if applicable) for the last few months.
Total your monthly income and expenses. Begin to add up all of your tracked expenses as well as your monthly income.

Create Your Budget

Your cash flow analysis will show you if you are spending more than you are earning and what expenses you may have to cut back on and budget for more carefully. To get started, you will need to prepare an accurate account of your monthly income and expenses.

When you are ready with that information, follow these easy steps:

List your pre-tax monthly income. This includes salary, investment income, etc.
List and subtotal your monthly expenses–fixed and variable–in the following categories:
- Combined taxes. Your federal, state and social security taxes withheld every month.
- Housing. Your mortgage, rent, association dues, insurance, etc.
- Home care. Include cleaning, landscaping, repairs, utilities, etc.
- Food. Include your groceries, dinners out and all other food expenses.
- Auto. Monthly payments for your car loan or lease, insurance, maintenance, parking, gas, cell phone and other expenses you might have.
- Insurance. List premiums for your health, disability, life, and any other insurance policies. If you pay quarterly premiums, then divide by three to get a monthly figure.
- Education. Any tuition you currently for your child or yourself as well as any student loans, etc.
- Personal Care. This includes clothing, cosmetics, gym, entertainment, vacation, gifts, etc.
Total and compare the income and expenses columns.
- Positive cash flow: Do you have money left over? Then you’re spending less than you make and are in good shape. You could apply the extra money to one of your credit cards or other debts. And if you still have money left over, you should consider increasing your savings.
  - Negative cash flow: If your expenses are more than your income, you should create a budget to cut back on your variable expenses. Remember, the key is to always spend less than you earn. If you can’t find ways to cut expenses, then you’ll need to step back and really evaluate what you currently view as “necessities.” They may be luxuries in disguise that you can live without.