Your Cash Flow is Critical for Your Home Budget and Financial Success

Ever feel like your money disappears as soon as it hits your account? You're not alone. Many Australian households are struggling, especially those juggling debt and a mortgage.

The secret? It's all about cash flow. Understanding and managing your cash flow is the key to taking control of your finances and achieving your money goals.

Your cash flow is the difference between the money in and the money out of your accounts. In other words, the amount of income you have versus the amount of money you spend.

Having a healthy cash flow means you have enough money coming in to cover your expenses and prevents you from relying on credit cards or loans to make ends meet, which can quickly lead to a debt spiral.

One of the first steps to understanding your cash flow is to write down the income you receive and take a guess at all your outgoings and expenses.

The easiest way to do this is to create a simple budget (on paper, in a spreadsheet or using an app) and put a dollar amount against all the different expenses you have.

Your first budget is just a starting point as to what you think you earn and spend and gives you a rough idea if things look good or bad.

Don't get too bogged down and don't worry if you can't remember all your expenses (the spending review next will help).

Once you have your first budget, it's time to look at your recent spending to see where your income has actually gone.

To start with, take a look at the last one to three months' of bank statements and track and group them into spending categories (groceries, subscriptions, etc.).

You can do this manually in a spreadsheet, but I find it much easier using an app (like MoneyFormula) that lets me load my transactions and helps me group them into spending categories.

Once you've completed your spending review, go back and check your budget and update it where required.

A budget is a guess at where you think you are going to spend your money, so it is more of a forward-looking plan.

A spending review is looking at where you actually spent your money, so it is looking backwards at the facts of what actually happened.

By doing a spending review and understanding your habits you have a better chance of creating a realistic budget for your cash flow and staying on top.

For example, if you put in your budget "coffee $5 per month", that's great. But if it turns out you are spending "coffee $50 per month", then your budget is not much use to you; so the spending review helps fix it up.

When you plan your budget, always try to leave a bit left over each month. Bills can vary (water, electricity, food, etc.), so the spending will never exactly match what you budget.

By having a small buffer, it gives you a little bit of breathing space each month; and if you do have extra left over, you can always put it away for a rainy day (for example, in your emergency fund).

An emergency fund (or safety net) is an account where you put aside money for unexpected problems. Ideally, it contains anywhere between one and three (or more) months' salary.

Unexpected expenses happen – car repairs, medical bills, job loss. Having an emergency fund protects your cash flow from these shocks and prevents you from going into debt to cover them.

There is nothing worse than budgeting diligently for 12 months, slowly moving ahead just to find a single unexpected event sets you back a few years or worse! An emergency fund is there to catch you and prevent anything serious happening to your finances.

As a side note, I like to keep my emergency fund in my mortgage offset account (or redraw) so that it works harder for me. That way, not only does it do the job of protecting my cash flow, but it also helps me pay down my mortgage faster and I don't pay tax on the interest saved. I have covered this more in the Offset Account Savings article so check it out if you want the details.

Knowing you have a handle on your cash flow is great for your mental state. No more bouncing from paycheque to paycheque.

You can start saving for things you want, tackle any debts you may have and even start paying down your mortgage.

Managing your cash flow is a simple yet critical step to financial success.

Try the MoneyFormula Five Steps to Success today and discover just how easy it is to take control of your cash flow and achieve your goals!

Money Formula will help you complete your first budget in minutes, review your recent spending and get an accurate picture of your finances. It even has a dedicated cash flow report that shows you month to month exactly how you are tracking.

You can set up your emergency fund, track savings goals, work on paying down debts and set a goal to crush your mortgage.

Give MoneyFormula a go and see what you think!