Most households have a limit to the amount of money coming in. And that is why an understanding of cash flow is essential for household budgeting and knowing where your money is going.
A significant part of managing your family’s budget is understanding cash flow, which is the movement of money coming in and going out and an important element of household budgeting. Cash coming in is the money that is earned or received by way of a gift or winnings. There is usually a finite amount of cash. Most successful households have a positive cash flow meaning the money received exceeds the money used for expenses. Cash used for expenses can be broken down into non-discretionary or discretionary spending:
- Non-discretionary spending is those items that you need to survive. That’s the money that you have to spend on rent, mortgage payments, heat, lights, gas for your car, car payments, etc.
- Discretionary spending is the money you’re spending on entertainment, communication, restaurants, take-out food, food not necessary to survive, vacations, clothing in excess of the minimum and other luxury items.
The key aspect of household budgeting, cash flow and cash flow planning is understanding where your cash is being used. Whether you are a single individual living with your parents, in your own place (with or without roommates or partners) or supporting a family, it is probably safe to say that there is a limit to the amount of money coming in. Prioritizing how that income is spent is the step to be taken after you have identified all the things you are spending money on. It is called making a budget and this process can help you make the most of your living situation.
The first and easiest step is simply looking at your bank statement at the end of each month and seeing if you have a positive balance that is increasing from one month to the next. If you do, you have positive cash flow. The next step is simply tracking your expenses. This can be accomplished by collecting receipts for everything you spend money on. Then add them up and classify them by category. The “old school” way to track your expenses when household budgeting is to have a paper and pencil ledger in a notebook. You can also use a spreadsheet like Microsoft Excel or Apple Numbers which is now available for free on Apple iOS devices as a free App. You can also make this easier by using a personal financial program like Quicken which lets you enter your expenses and track them. Many banks format their data to allow customers to download this data into these popular programs. There are also financial Apps now available for mobile devices.