The Importance of Cash Flow Management

by Miranda Marquit

Do you know where your money is going, and when it is getting there?

One of the most important aspects of managing your personal economy is understanding where your money is coming from, and where it is going. You should also know when all of this is happening. Cash flow management in your personal finances is important, since it keeps you from overdrawing your account and helps you plan ahead for larger expenses. When you know how money flows through your personal economy, you are in control.

Understanding Your Cash Flow

If you want to get an idea of how money is moving in your personal finances, the first thing you need to do is keep track of everything:

  • Note your income. Find out when you are paid. This is about more than just recognizing your monthly income. You should know when each pay day is (the first of the month, or every other Friday, etc.), and how much you will receive each time you are paid.
  • Track your expenses. Next, you should know where your money is going, and when it needs to get there. Figure out how much is going into your retirement account, emergency savings and for bills. Check to see when your regular bills are due, so you know when that money will be needed.

Knowing where your money is coming from, how much of it is spoken for, and when it needs to be taken care of, is very important. If you do not have an idea of how your money is moving through your personal economy, it is much easier to make mistakes — and you could find yourself overdrawing your account and perhaps not having the money you need to meet your obligations.

Cash Flow Management

Once you understand how your money is moving through your personal finances, you can begin to make changes to the way things are done. When I first started as a freelance writer, I paid bills right when they came in, with whatever money I had on hand. I soon discovered, though, that this was a recipe for stress. Even though some bills weren’t due for 15 days, I paid them immediately, using up the money, and struggled to buy groceries. I would be stressed for the next nine or 10 days, waiting for my next payment, so we could pay for things other than bills.

After thinking about the situation, I realized that, even though I am a freelancer, I have a fairly regular payment schedule, receiving payment on around the 1st and 15th of each month. I looked at my bills and realized that many of them weren’t due until the last half of the month. It became obvious that, instead of paying all the bills at the first of the month, my cash would flow more easily if I waited until after receiving my pay on the 15th to pay bills due later in the month.

I created a schedule that allows my bills to be paid closer to their due dates. This was helped in large part by the ability to schedule payments through automatic debit. This way, my payments are scheduled so that money comes out of my account the day before they are due, and I have that cash for a longer period of time, able to use it for things like groceries. I also schedule regular transfers of money from my checking account to my savings account, and have my retirement contributions automatically debited. I arranged to have all of these debits spread out throughout the month, based on when I normally receive income.

Having a plan for my money, and directing its movement through my personal economy, has resulted in more efficiency, increased savings and less stress.

Published or updated September 30, 2010.
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1 KP

This is one of the most important principles in money management. Understanding where your money goes and effectively managing it makes a real difference.


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