There are 3 basic financial statements used in business: the Income Statement, the Balance Sheet, and the Cash Flow Statement. You can apply these directly to your household financials to help you manage your money effectively. The first one to apply is the Cash Flow Statement.
You’ve heard “Cash is king” but in reality, Cash Flow is the king. Cash flow is the comparison of cash at the beginning of the month with the end of the month. If you end the month with less money that you started with, then you have a negative cash flow. It’s a simple concept, and many people miss it when it comes to their household.
Growing up, my mom always said things like “house poor” or “car poor.” I know she didn’t make these things up, but she’s getting the credit from me. She used these terms when she drove through our old neighborhood. We grew up on the south side of Columbus, OH. I just looked at the house we used to live in on Zillow.com, it recently sold for $84,000 and it’s in ‘great condition’ according to the listing. There’s a 2013 BMW 535i in the driveway of the “SOLD” photo. That’s probably a $450/month car. I’m not judging. It’s your life; it’s your money; I don’t care what you do with it.
What my mom was really saying is: we all have a set amount of cash at the beginning of the month, and that people in that neighborhood were deciding to stay in small, cheap, run-down, high-crime neighborhoods so that they could afford a nice car. They were car poor. Because they had a nice car, they were poor. If they drove a Ford Fusion instead (hey, I drive a Ford Fusion), they’d have $250 a month ($3000 a year) to put towards paying down debt, traveling, moving to a safer area, etc, etc, etc. It’s a generalization, it could have been wrong… maybe they preferred a BMW to a good school district. Maybe they preferred a BMW to a big house and they were saving on mortgage money to travel the world… Maybe they worked at a BMW dealer that lets employees drive home in a BMW every day. I don’t know who they are, but I know that they drive an expensive car in a bad part of town… seems dumb.
So how could a cash-flow statement help this guy (assuming the worst)? Let’s say he’s making the 43232 average income of $30,973. After taxes, etc his take home will be $442/week or $1,768 per month. (http://www.calculator.net/take-home-pay-calculator.html)
So his Cash in for the month is $1,768.
The next line on the cash-flow statement is payments to suppliers (this is a summary of your bills)
What’s your cash flow statement look like? Are you cash-flow positive this month?