Tracking Your Spending Isn’t a Punishment, It’s Empowerment.
Be nice to yourself! At Sophia, we want you to have the tools to own your financial situation. We want you to feel powerful and knowledgeable. Calculating your net worth and understanding your cash flow form the base for launching your financial success.
The Nitty-Gritty of Tracking Cash Flow.
First, money in: how much money do you bring in on a monthly basis from sources such as employment salary, business income, pensions, investments, and rental income? Then, money out: how much are you spending on things like groceries, shelter, services, cell phone, clothes, entertainment, subscriptions or memberships, car payments, and insurance?
If you’re like many people these days, your income arrives via direct deposit to your account, and you use a debit card for purchases, so the bulk of the tracking has already been done by your bank. Bank statements give a nice summary at the end of each month with totals for money that has come into your account, and the money that’s gone out — money in, money out.
Gather at least three consecutive months’ worth of data on your cash flow. If your expenses and income vary considerably from month to month, you may prefer to look at six months, or even a year’s worth of information. Compare the totals from the in and out columns. Are you spending more than you’re earning each month? Or, are you just breaking even? If either of these situations is the case, it’s time to look for opportunities. Where can you make a choice to spend less without punishing yourself? For example, if you’ve been dining out two and three times a week, consider going out for one beautiful meal each week, but don’t stop going out for dinner altogether.
“It’s important to have compassion here, not feel like a prisoner to your own financial plan.”
Maybe you’re spending less than you’re bringing in and you have a little money left over every month. This is where things really get exciting because we can start to talk about investing and growing your money… but we’ll get to that step later.
A Negative Net Worth
What if you’re net worth — cash holdings, or assets that can be quickly converted to cash, minus liabilities such as a mortgage, loans, and credit card balances — is negative? If the negative balance is a result of overspending, the cash flow exercise will put you on the right track to turning that number around. However, there are three scenarios where having a negative net worth is positive: one, because you’ve invested in an education that will allow you to increase your future income; two, because you’ve started a business that will generate income to support your financial needs in the future; or three, because you’ve invested in buying a home and you have a mortgage.
As you work to find clarity on your financial picture, try to keep it simple and take it step by step. We’ve created two straightforward spreadsheets to help you with your analysis. Download the Sophia Net Worth Calculator and the Sophia Cash Flow Tracker to get started.
Listen to Wise Money Moves Podcast, Episode 5, to hear Tracy and Kamal talk about cash flow practicalities.