Treat your finances like a business.
“You do not rise to the level of your goals. You fall to the level of your systems.” James Clear’s
This quote made me add Atomic Habits to my reading list and it first got me thinking about my financial system. I have no clue what the author may recommend, in such a book, with regards to financial system and yet, I realised I still needed to do better even if I’ve come a long, long way!
I’ve been independent for years now, with irregular incomes and no way to predict when or even if, my invoices were going to get paid. It makes handling my finances sometimes difficult. For me, it also means that some quarters are tight, and that a sudden expense can have difficult consequences.
You might be in a similar situation and nodding thinking “Yeah! I’ve been there!”
Or you might have pay checks coming in like clock work.
In both cases, having a cashflow will help you deal with any fluctuation and uncertainty. But not just that… Read on!
A personal monthly cash flow
There are different forms of cash flow and the one that will be the most useful is a monthly one. The fact that it is monthly is what matters but then again, maybe you’ll need a weekly cash flow if this is how you get paid.
Your cash flow will need to show all forecasted income and expenses. You can then update it monthly to change the forecasted figures into the realised ones.
Now the great part is that, if you have already used Excel to create your budget and if you track your expenses, you won’t have much more to do! If you haven’t just spread expenses linearly that is. For your cashflow to be effective, you need to have expenses indicated when they are to paid. For example, if you pay your insurance annually in January, do indicate the full amount in January, not 1/12 per month. And vice versa.
How to start a cash flow?
There are plenty of templates out there. Get inspiration from these to create what suits you best. Sorry, I’m not sharing the one I created because it includes my business and personal accounts, my professional and personal expenses, etc. It most likely wouldn’t be useful to you.
Let’s get this done, shall we?!
First, as mentioned above a cash flow, should state your income, all your incomes!
So in each monthly column, you indicate the net salary amount received / expected for the future months. If your company has a minimum bonus amount paid every year, do add it to the corresponding expected month.
If you have other types of income, add new lines to your spreadsheet to clearly separate them. There are many ways you’ll be able to use such data at the end of the year, so do be specific.
Tax reimbursements expected? Add a line. A friend is supposed to reimburse you? Add a line! Online income, dividends, selling your car… you get the point.
With all your columns filled, add a line for a total and there you have all your cash in.
Next, you need to fill up the part about your expenses.
Again, you really should be specific as these data can be used in lots of different ways, at the end of the year.
Rent or mortgage, utilities, council tax, income tax, clothes, food, travels, self-care, books, gifts….
If you already have a budget in place, this should be super easy as you can just link your spreadsheets or even turn your budget into a cashflow.
The really important think is to indicate the entire amount paid at the right time, not spread over the year.
If I go back to my own cashflow as an example, I know already how much I’ll be charging my client in April 2023. Therefore, I also know how much VAT I’ll have to pay that month. It doesn’t matter if my client hasn’t yet paid my invoices, I’ll have to pay 100% of the VAT on the invoices issued. This is a certain amount of cash flowing out!
Other examples? I pay my social security monthly, some income tax quarterly… These are known in advance as well, even if they could change during the year, based on the previous year declaration.
Examples not related to my business? I know when my partner’s birthday is and I can make provisions for his gifts, yes, plural!
Once more, with all your columns filled, its time to add a line to sum up all your expenses and know all the cash that flow out of your account(s).
Cash flow in minus cash flow out = net cash flow!
The next step is actually to know what is left once you deduct all your expenses from your income. So just add a line to do the calculation. This sometimes hurts! 😉
You should add a column at the beginning of your spreadsheet to indicate your bank account starting balance. This will enable you to reconcile monthly with your bank statements.
And now you know what your bank balance will look like throughout the year. It can be scary. It can be reassuring. It can tell you when to be careful.
Do add a yearly column to sum it all up and check all is in line. This will also be useful if you wish to make visual representations of your cash flow. I also always have a column and sometimes additional cells to check the figures, to be sure all adds up. The calculation is just done differently.
Up to here, you may still not be convinced why you should put all these efforts into a cashflow…
Why is a cash flow better than a budget?
One of the reasons, a cash flow is better than a simple budget is because it is so much more precise. It is predictive and gives a visual representation of your finances, all your finances. Not just your spendings.
If you are simply looking at your yearly expenses compare to your yearly income, you may not notice a slump in your bank balance because of the payment of a specific yearly expense. Yearly amounts are important. The monthly ups and down of your bank account is more!
In addition, once you have gathered a couple months of data, you’ll be able to use such data to see trends in your own consumption. You’ll be able to refine sections of your spending, work on diversifying your income and track your progress.
And once you have gathered more data, a whole new world of possibilities will open!
A cashflow is just a tool, a first step.
The ultimate goal of your cash flow will probably be to determine how much and at what pace you can make investments.
I know that plenty of financial gurus say that saving should be on auto pilot / automatic debit form your pay check. Maybe it works for you, it certainly doesn’t work for me and lot of other people! You certainly never want to see your bank balance turn red, because of your automatic transfer, when it would have been fine, if you had delayed your investment by one month.
In addition, and those are just another example why automation doesn’t always work: I have some investments which are done for tax saving purposes and these are done only once a year.
And one month you might want to invest into something specific and then have to wait 2 months before finding another opportunity.
Automation may be good for certain type of investment but not for all of them and certainly not for everyone.
So what I’m saying here is that everyone is different.
You and I probably live in a different country any way. Countries which have different rules and different types of accounts / savings / investment opportunities. You need to learn about your environment and adapt to your own circumstances.
Once you are there, your cash flow will probably get a makeover with a new section for your investments. With Excel, it is easy to track your bank balances and your various transfers to your saving accounts, online investments and all your other types of investments. It is also easy to create other spreadsheets to follow their returns and to automatically have the income related to such investments populated back into your main spreadsheet income sections.
A detailed cashflow can become a powerful tool to improve your finances. On one side, you can track your income, all of your income sources, on the other your spendings and in between define an investment strategy. With all the data concentrated in one place and with the magic of Excel, you can create visual representations of your finances, habits and progress. You can anticipate realistically for big spendings. You can track your net worth and check your investments progress. The possibilities are almost endless!
There are good reasons why cash flows are used by businesses all over the world. And I hope I somehow convinced you to treat your finances just as professionally as businesses do. And yeah, if you read any of my former pieces on such topic, you know I’ve come a long way! This should also convinced you that you can too!