Lesson 2: Where Does Your Money Go?

MYM-2-03

What is Cash Flow?

Your cash flow is simply the money going into your pocket and checkbook and out again. It is matching up your income with your expenses. Sounds simple, doesn’t it? It usually is. When you want to have a good idea of your spending you need to keep track of what actually comes in and goes out each month.

As you fill in the worksheets in Lesson 2 you may discover you do not have complete records. For the most accurate look at your budget, it would be helpful to review expenses and income for an entire year. Unless you have that information, you will need to base estimates on information from your Spending Log and Dollar Tracker records from Lesson 1. Use a pencil. Do the best you can for now. As you continue to keep track of expenses you will be able to revise the charts.

The more accurate and complete the information on the worksheet, the easier and more effective your financial planning can be.

Income, money flowing in, is an easy calculation for a salaried worker with no other sources of funds. In contrast, a sales representative paid with commissions will need to estimate income. Seasonal workers and farm families deal with fluctuations over the entire year, rather than week to week or month to month. Planning ahead is especially important for them so funds for expenses can be set aside. If the amount of income varies, it is best to estimate income on the low side. When income is greater than expected, go back to your list of goals in Lesson 1 to identify priorities for the dollars.

Income from last year is a model for planning for the future. Add or subtract for specific adjustments you know will increase or decrease income. If it varies a lot, use the minimum figure to plan income.

Worksheet 2-C: Income The flow of cash into the budget can be summarized on the chart.

Expenses are the flow of cash out of the budget. To work on the expenses for cash flow going out, you will need to collect all of your bills, receipts, and check record which will help you keep track of your spending for the month. Your Spending Log and Dollar Tracker notes from Lesson 1 are also sources for spending data. (It could be last month’s, this month’s, or both.) Include both fixed and flexible expenses. Do you know the difference?

Worksheet 2-D: Fixed Expenses Use your checkbook and receipts to gather figures on the repeating fixed commitments.

• Fixed expenses are items such as rent/mortgage, car payment, and other regular installment payments that basically stay the same each month and for which you are committed for a period of time. Your obligation for a fixed expense is made when you enter a contract or commitment. An example is a lease to rent an apartment or mortgage to buy a home.

Worksheet 2-E: Regular Flexible Spending With limited records available, you may need to estimate some amounts for flexible spending. As you continue to keep spending records, you will have a more accurate picture of where money is going.

• Flexible expenses are the expenses that change from month to month such as food, clothing, and utilities. You have a bit more control over some of these items. Each purchase involves choice and decisions that determine the cost for the month.

Worksheet 2-F: Occasional Expenses The calendar may help you recall expenses that are seasonal and only occur a few times during the year. Planning for this type of expense will be discussed in more detail in Lesson 5.

• Occasional expenses are the costs that only come periodically. Semiannual auto insurance and an annual homeowner’s insurance premium are examples. Auto tags, holiday gifts, and a vacation are other occasional categories to include in your planning.
• Combinations may occur. For example, the local cost of phone service can be fixed but the long distance usage is flexible based on the number of times you use the service.