Creating a cash flow chart is vital for future financial independence. A cash flow chart will show you if and how well you are able to save, if you are living beyond your means and how well your financial future will play out if you don't make any changes.
It will also highlight all of the problem areas where changes need to be made, as well as assess your current standard of living. A cash flow chart is basically a list of everything that you shell out money for each month.
In addition to the expenses that are highlighted in your budget such as utilities and groceries, a cash flow chart includes expenses that you might not think of such as entertainment, dinners out and shopping indulgences.
There are two options when calculating expenses for a cash flow chart: you can estimate expenses or track exact figures for a period of time before completing the chart. Tracking is the preferred method as it allows you to realistically calculate expenses and see what you're really spending.
Most people underestimate what they spend for certain things. For example: You may think that you spend $200 a month eating out, but the numbers might be much higher or lower when you calculate the total using receipts and bank statements.
To create your flow chart, first gather all statements that you can use to track spending including bank statements, credit card statements, receipts, billing statements, etc.
Review the expenses on these statements and categorize each expense using the following categories: mortgage, utilities, maintenance, taxes, car payments, commuting expenses, credit cards, insurance, loans, clothing, child care, food, medical, education, vacations, entertainment, alimony and child support.
Don't forget to include a category for savings and investments. Include everything that you pay out, and look for hidden expenses. Once you have gathered all of figures, add the expenses of each category together to create a sum total for each category.
Now, add up your income and subtract your expenses from your income. Hopefully, the number will be a positive number. If not, you need to make some quick changes to get your finances in order. To improve your balance sheet, look for areas where you can save money.
If your cash flow chart indicates that you are spending $300 a month on entertainment, make an effort to reduce the amount of money that you spend for entertainment. You don't have to eliminate entertainment from your budget. Instead, look for less expensive ways to have fun with your family.
Other areas where quick changes can be made include clothing, food, vacation and personal items. If you have a shopping habit that is wreaking havoc with your cash flow, limit the number of times that you go out shopping each month. Do everything that you can to improve your numbers. Your financial future depends on how well your cash flow is handled today.
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