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Top 3 Reasons to Know Your Cash Flow

We talk a lot about budgets, but what happens when your income and expenses aren’t consistent? That unpredictability makes budgeting trickier. An easy way around this problem? Monitoring your cash flow.

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Tracking your cash flow is a great idea for anyone, since it tells you whether you’re spending more money than you have coming in. It’s an especially useful tool for those who freelance or don’t have consistent monthly income. Keeping track of cash flow is a must for small businesses, so why not apply the same system to your personal finances? Here are three reasons to know your cash flow:

1. It shows you your ups and downs

When you track several months’ or a year’s worth of cash flow, you’ll be able to see your financial ups and downs. If you work for yourself, you’ll notice trends in your cash flow: maybe your clients thin out during a particular time of year, or you take on fewer contracts in the summer. (Cash flow software, apps and Excel templates are your friends if you want to analyze the data you collect.)

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2. It promotes financial flexibility

People who get regular checks from their employers and tend to have steady expenses can have an easier time sticking to a firm budget. If your income fluctuates, though, a budget that sets firm short-term spending rules is less useful. Instead, your spending will need to be flexible according to how much cash you have coming in. We’re not saying that you should live like a king one month and eat instant noodles the next. In fact, analyzing your cash flow over time can help you even out the fat times and the lean.

3. It’s motivating

Seeing your cash flow spread out before you can be motivating, whereas a budget can sometimes feel like just a set of rules. Looking at your cash flow may inspire you to break up with that client who never pays you on time, or start advertising your freelancing skills and drum up more business. It can also help you identify areas where you tend to spend the most, motivating you to cut back.

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Bottom line

It seems like the simplest thing in the world to follow the old rule, “Don’t spend more than you earn.” But then it should also be easy to follow the rule, “Don’t consume more calories than you burn,” and have you seen our obesity rates lately? By tracking your cash flow, you’ll see the ups and downs in your income — and can spend accordingly, making staying in the black easier than ever.

Photo credit: flickr

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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