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Why is Cash Flow the King in Personal Finance?

Have you ever struggled to manage cash to pay for your expenses at the month-end? If yes, it could be because you are having cash flow issues. You are not alone; many individuals have the same issue for various reasons, such as unplanned expenses or not preparing a budget.

Maintaining a positive cash flow in personal finance will ensure you have enough cash to cover your expenses at any time. This article will discuss cash flow and its importance in personal finance.

What is Cash Flow?

A cash flow refers to your earnings minus expenses over a certain period. It helps individuals as well as businesses to identify their financial standing. Cash flow includes cash and cash equivalents that come in and go out of your available funds.

You can calculate your cash flow monthly to manage your finances. It assists you in determining whether you have a positive or negative cash flow. Having a positive cash flow assists you in saving funds or investing in various financial instruments. Negative cash flow indicates that you have spent more and should look for ways to reduce unnecessary expenses.

What is the Importance of Personal Cash Flow?

A personal cash flow analysis helps you understand the various sources of income and how you spend your earnings. It assists you in the areas you need to improve and prepares you in case of any emergency. Apart from all these, the significance of personal cash flow is as follows:

Setting a Goal

To achieve your financial goals, you need to analyse your day-to-day expenses. It will help you save for the goal by making investments that will benefit the future. If you do not have enough funds, you can rework your goals through cash flow analysis and generate enough earnings for investment.

Managing Debt and Purchasing Asset

You must understand your financial position when buying a new house or a new car on loan. It will help you determine your repayment capacity and assist you in debt management. Personal cash flow is significant while managing your debt and setting a goal.

Planning for Insurance

Cash flow in personal finance helps you find the appropriate insurance coverage. To do that, you need a clear idea of your expenses, goals and the loans you have taken. Through cash flow, you can understand the insurance coverage provided by the policies you have purchased.

What are the Benefits of Cash Flow in Personal Finance?

You need a sufficient amount of cash to spend every month on your needs and wants, and save from the same. The following are the major benefits of cash flow in personal finance:

Track Spending Information

A cash flow statement gives you a detailed view of your spending. It includes payment of groceries, electricity bills, internet charges and many more. Through this, you can analyse the area you are spending more and seek options to reduce such expenses.

Maintain a Better Cash Balance

An accurate cash flow statement ensures that you have enough cash balance as savings. It gives the scope to save and invest those funds in various financial instruments or buy insurance.

Improves Planning

Through cash flow analysis, you can improve your planning. It helps you determine your short-term and long-term goals. The information will help you to analyse your past income and spending, and by this calculation, you can plan accordingly towards your goal.

How to Determine Cash Flow?

To determine cash flow in personal finance, you must subtract your outflow from the monthly cash inflow. Doing this will determine whether you have a positive or a negative cash flow.

Having money left over after calculations indicates a positive cash flow which specifies that you are saving funds and can utilise them to invest in various financial instruments to secure your future. However, if you notice a negative amount after calculating the cash flow, it specifies negative cash flow indicating that you have spent more than your income, limiting your options.

How to Improve Personal Cash Flow?

If you have a negative cash flow, you should consider improving it. This will allow you to save more and invest the funds in various financial instruments. You should create a budget to track your income and expenses to improve your cash flow. Further, you should consider the following tips to improve the cash flow:

Use the 50/20/30 Rule

The 50/30/20 is one of the most popular budgeting rules. Under this rule, you spend 50% of your income on necessities, 30% on your wants and the remaining 20% you save. 50% includes rent, groceries, internet/phone bills and transportation charges. The 30% includes wants such as entertainment, dining out or buying clothes. This lets you analyse where you are spending more and cut those unwanted costs.

Automate Your Savings

Most people wait until the month-end to save any leftover earnings. This is not always possible as you might not have enough money then. You should opt for automatic withdrawals that will transfer some of the income to your high-interest savings account. In this way, you can save more and improve your cash flow.

Cut Down Your Expenses

After you make a budget, you can easily track your expenses. Through this, you can determine where you are spending more. It will help you in cutting down the unwanted expenses. This will allow you to bring a positive flow and improve your cash flow.

What is the Example of Cash Flow in Finance?

The following personal cash flow example will help you to calculate your finances:

Description	Amount (Per Month)	Amount (Per Month)
Cash In Hand	₹1,10,000
Other Sources	₹10,000
Incomes		₹1,20,000
Household Expenses	₹50,000
EMIs	₹25,000
Insurances	₹4,500
Expenses		₹(79,500)
Savings		₹40,500
Current Investments		₹(20,000)
Cash Flow		₹20,500

Therefore, maintaining a positive cash flow in personal finance is beneficial as you will have a surplus. You can use the funds to build an emergency fund or invest. It will help you achieve your long-term and short-term goals without much hassle. Furthermore, you can pay in cash for your expenses instead of availing any loan.

FAQs on Cash Flow in Personal Finance

What things can you include in cash flow personal finance?

It includes your income from various sources, expenses like rent or mortgage, loans, credit card bills, and expenses on your children. It will also include electricity bills, subscriptions to various media platforms and shopping expenses.

When should you do a cash flow analysis?

You can do cash flow analysis monthly, quarterly or annually. Doing it monthly will help you more as it will guide you on whether you are spending or saving more monthly. It will assist you in lowering your spending to achieve financial goals by taking the correct actions.

What are cash equivalents?

Cash equivalents are highly liquid short-term investments that can be easily convertible to cash upon your requirement and are one of the safest investment options. They have low risk and provide low returns.

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Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.