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Cash Flow: For Your Budget to Stick, You Must Have This Covered!
Cash flow isn’t just a concept important to businesses. To properly manage your personal finances you should understand the basics of cash flow and its importance in supporting your budget. Simply put, cash flow is the flow of cash in and out of your accounts. You can be considered to be properly managing your personal cash flow if you never bounce a check and rarely, if ever, have to take out a loan or use a credit card to make ends meet.
If there isn’t a significant cash buffer or a detailed daily balance forecast supporting the low points of your daily checking account balance, your monthly budget can cause you unexpected heartburn. Especially when starting out with a new budget, it’s easy to overlook your cash flow situation. If you have, for example, 00 coming in and 00 going out each month, that doesn’t automatically mean everything will be fine. If most of that 00 is in the beginning of the month, and you get paid twice a month, you could very well be short for several days during the middle of the month. If you forecast your checking account register, day by day, for at least a month in advance, you can see where any shortfalls are and hopefully re-arrange when you pay a couple of your bills; this is assuming you’re living paycheck to paycheck. A more relaxing and emergency-proof approach is to combine this forecasting with a small fund (of at least 2% of your gross annual income) to absorb the low points of your daily checking account balance. This fund also can offer some relief for unexpected expenses.
Being aware of cash flow and taking the actions of forecasting your daily cash available and building a buffer fund to support your checking account will help you significantly. These actions will protect your budget and will give you time to proactively respond to money problems before they hit your accounts - keeping them out of the red and yourself relaxed.
About the Author: Brad Homer is focused on helping others achieve their personal and financial goals. His website hosts personal finance articles like this one and his free-to-try software, Millionaire 2020™, which can help get you on the path to good budgeting fast.