Monitoring your free cash flow is an excellent budgeting tool. Understanding what free cash flow is and how it affects your finances can allow individuals to reduce financial stress. Free cash flow is a simple concept that all people should be aware of.
Free cash flow is a common financial term used by many businesses. Businesses monitor free cash flow in order to understand the firm’s performance and predict future budgeting conflicts. Understanding the concept of free cash flow can help individuals create effective budgets and avoid debt.
What is Free Cash Flow?
Free cash flow can be defined as, a measure of a company’s or individual’s ability to generate enough cash flow in order to cover all expenses and maintain operations. When examining cash flow management one must ask themselves two key questions:
- How much money is coming in? (Cash Inflow)
- How much money is going out? (Cash Outflow)
Cash inflow is the money that is coming in to the household. This is usually made up of income form salary or wages. Cash outflow is all the money going out of the household. Cash outflow consists of fixed expenses, discretionary expenses, and taxes.
How to Calculate Free Cash Flow
Free cash flow can be calculated on an annual, monthly, weekly, or daily basis. Calculating free cash flow on a monthly basis is often the least tedious and simplest way to understand your personal free cash flow. In order to calculate monthly free cash flow use this simple formula:
Total monthly income (salary & wages) – Total monthly expenses (rent, utilities, gas, etc.)
Why Calculate Free Cash Flow?
Calculating your personal free cash flow is a useful tool to manage your finances. Knowing your free cash flow will help you avoid debt and make better spending decisions. Analyzing your free cash flow can allow you to cut out unnecessary expenses and optimize the use of you income.
Understanding your personal free cash flow will enhance your ability to create an effective budget to meet your individual needs. When creating a budget the cardinal rule is to not spend more than you earn. Writing down all of your expenses is an effective tool in visualizing how much you spend each month.
Financial planners are experts in budgeting. Financial planners are professionally trained and competent in creating effective budgets for families and individuals. Consider hiring a financial planner if you need help analyzing your finances or need help creating a budget.
When it comes to financial planning and understanding your free cash flow there is one simple rule: “Don’t Spend More Than You Earn”. In order to better plan your finances analyze your free cash flow. Next create a budget. Finally, maintain your budget. Hiring a financial planner is highly useful for those in need of assistance creating a budget and/or cutting expenses.
Right Financial Advisor’s Nick Bredow, contributed this report