Cash Flow 101: The Essential of Healthy Finances
“Making more money will not solve your problems if cash flow is your problem.” — Robert Kiyosaki
Cash Flow Measures the Movement of Your Money
Your personal cash flow is basically your income minus your expenses over a certain period of time — typically a month. Peter Drucker once said that if you can’t measure it, you can’t manage it — and that is exactly why we’re here to help!
If you want to afford stuff without having to rely on loans, if you want to grow your savings or even start investing, you need to start with the essential: your cash flow.
How Much You are Able to Save
We can simply think about cash flow as what you’re able to save from your salary each month. It’s important to know whether you’re spending more or less than you make, because spending more than you make means cutting your savings or even getting in the spiral of debt. And we don’t want that.
Positive Cash Flow is the basis of healthy finances.
Let’s Start With These Simple Steps!
Tracking Expenses
Already using Spendee to understand your money? That’s a good start! Take advantage of the beautiful analytics to explore what your weak spots are. How do you allocate your income? What are your spending categories? Is there space for you to spend less in some categories? Set up a budget to make sure you don’t overstep your limits.
The 50–30–20 Rule
Financial experts recommend saving at least 20% from your net income each month. It’s best to put 20% aside immediately after your salary arrives. You should put the money on your savings account, invest it, or repay a chunk of your debt if you have one. Once you start practicing this step, it will become intuitive and easy to do! But what about the remaining 80% of the money?
Next, allocate 50% of your net income to necessities (such as rent, utilities, transportation or groceries). Basically anything that’s essential for your daily life should fall into this category! Of course, it’s just a rule of thumb and it’s impossible to divide your money sharply. What we’re trying to say is that it’s wise to squeeze the necessities into the 50% Spending too much more than that might mean that your living standard is higher than you can afford. For example, if 45% of your net income only covers rent, you probably won’t be able to squeeze insurance, groceries, monthly bills and payments in the remaining 5%. Maybe you should find a different place with cheaper rent. If you spend less than 50% on necessities, it’s always wise to put the rest towards your savings or investments.
You can use the remaining 30% for personal expenses (your wants) — these are all the expenses that are enhancing your lifestyle. It’s your new clothes, beauty products, entertainment or travels that fall into this category. And much more! That’s why these categories are usually the ones where you can cut your expenses the most. To keep track, you can create budgets that will help you save real money and stay within the budget for necessities and personal expenses.
Recommended: 3 Budgeting Rules You Need in Your Life
Connect Your Bank Accounts
Whatever your financial goal is, you should always strive for the biggest positive difference between your income and expenses. When you update your Spendee account daily (whether it’s manually or by connecting your bank accounts), you can look forward to personalised updates about your financial health! We recommend connecting your bank account to make the analysis more convenient.
Recommended: Do you know your monthly Cash Flow?
Example
As you can see, Emily makes €2,000 per month. After she logged her income into Spendee, she used the rule of thumb to divide the money:
- €1,000 on mandatory expenses (50%)
- €600 on personal optional expenses (30%)
- €400 on savings or repaying her loans (20%).
How to get your Cash Flow under control? Start by setting up a budget like Emily! The easiest way to start is to set up a monthly budget for all your expenses with a limit in the amount of 80% of your monthly income. Spendee will warn you when you start approaching this limit.
