The way your money moves through your personal economy is known as cash flow. Your cash flow includes the money coming into your possession, and the way money moves out of your possession. You can track your cash flow by following your income and your spending. It’s important to pay attention to your cash flow because knowing where your money comes from, and where it goes, is essential if you want to avoid problems with overdrawing your account, and if you want to locate and plug money leaks.

Here are some things to consider as you track your money’s movement:

cash flow calculation

What Accounts are You Using?

You should have a clear idea of the way your money is moving through your possession. If your retirement account contribution is automatically deducted from your paycheck, then you need to understand that some of your money is headed toward one account, while the rest goes to another account. Pay attention to the way you add money to an emergency fund account, as well as additions to a joint household account, if you and your spouse separate your finances.

Track where your money goes when you pay bills and make purchases. Do you have your cable bill automatically paid by credit card each month? You need to make sure, then, that you have enough cash flowing toward that credit card account to pay off the balance each month so that you aren’t paying interest. If you want to make your life easier, you can automate tracking with a free online tool like Personal Capital.

If you notice that a great deal of your cash is flowing toward unnecessary expenses, it becomes evident why you seem to come up short every month. Putting your finger on the pulse of your spending, and seeing where it actually goes can help you make better spending decisions in the future.

When Does Your Money Leave Your Personal Financial System?

Understand, too, the timing related to your cash flow. Recently, I made a critical cash flow error. I forgot about my quarterly estimated tax payment. My mortgage payment and IRA contribution both come out on the same day. Most of the time, that’s not a problem. However, it became a problem when my quarterly tax payment came out the same day — and my car loan payment came out a day later.

Suddenly, everything piled up, and my normally smooth cash flow was snarled. I had moved some “extra” money from my “bill paying” checking account to a my brokerage account, hoping to buy a few extra shares of dividend stocks. Nothing got sent back, but an overdraft (and subsequent fee) was involved. All because I didn’t pay attention to the timing of all of the automatic withdrawals. As you evaluate your cash flow, and set up automatic payments, it’s important to consider timing. When your money is at different points in your personal financial system is as important as where it is.

Setting up a plan for your money can be a great way to ensure that you have what you need, and that your money moves with purpose. However, you do need to pay attention, and set up a system that allows you to ensure that your cash flow remains positive.

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