This is a guest post from Money Beagle, who writes about personal finance with a focus on the personal side of things.
A few years back, my financial tracking was a lot less involved than it is now. I had started tracking my Net Worth and investment performance in 2001, but that was about the extent of it. At the time, I had a low mortgage payment, was making pretty decent money, and the net worth statement went up more often than not. I was single and had money to spend when I needed it. Life was good.
At the time, I knew that I was doing pretty good with saving. Every few months when my savings account balance would grow, I’d take a chunk of cash and either send it off to retirement savings, a high-yield savings account (this is back when they were paying 5-6%) or something else.
Financial life was pretty smooth!
Then something happened to change all that: I bought a car. Or, as might be more appropriate, I bought a second car. A fun car. A sports car!
I’d always had my eye on a Corvette. They’ve always been my favorite car, and since I had recently done very well in the stock market, knew I was saving money, and knew that the car I coveted was pretty good at holding its residual value, I started taking a look around. I found one I liked and away we went!
The car: Awesome. For everything I’m about to write, I have no regrets about having bought the ‘Vette. I saved it for more ‘special occasion’ driving, put minimal miles on it, and loved every second I was behind the wheel. That includes spending a lot of time behind the wheel just parked in my driveway or garage. I loved it that much!
It took awhile, but I noticed that I wasn’t doing my somewhat regular contribution to savings that I had noted above. By that I mean, I had stopped altogether.
I sat down one day to take a look at why this was. I knew that the extra car payment and insurance was going to slow things down, but I thought I’d still be able to put money aside.
Turns out, I was WRONG!
I sat down and added up what I brought in (my paycheck) and subtracted out all that I was paying out (mortgage, car payments, insurance, utilities, spending money, groceries and everything else). I didn’t believe what I saw so I added it again and again. It still came out the same. I was spending more than I brought in!
I had a cash flow problem!
Even though my net worth was going up, it was because I was seeing increases in non-cash areas. My mortgage balance was going down. My retirement contributions were growing. The value of my house was growing (ah, the good old days).
But, the numbers didn’t lie and they said one thing: I was slowly bleeding cash.
Luckily, even though I was burning through cash, it was a slow burn where I was pretty near the break-even point. It would have taken me a few years at the rate I was going before I would have run into a real cash flow issue. In all honesty, that’s probably why it took a while for me to even notice it.
Still, even though I wasn’t in any imminent danger, I didn’t like it. So, I resolved then to begin tracking my cash flow and I started right then and there. Now, in addition to tracking my net worth, one of the statements I prepare every month shows our cash flow. It’s as simple as I outlined above:
Money in minus Money out = Cash flow
If the number is positive, things are good. If it’s negative, then there’s a problem! Tracking it makes me aware of any issues so now I can head off any possible issues.
To finish off my personal ‘Vette story, I fixed the problem. You might think I turned around and sold the car, which would have been the best method to address the problem. While I ended up doing that, it was over a year and a half later before I did, and was for different reasons (I was about to get engaged).
What ended up happening to relieve the immediate problem was a friend of mine ended a relationship and needed a place to stay. I had a spare bedroom and the $350 that my new roomie brought solved both of our problems temporarily. This brought me back into positive territory and let me keep the car longer and later sell it on my terms, and not in a panic as I might have otherwise done had the problem gotten worse.
This was my eye-opening experience on the importance of knowing and tracking your cash flow. Please stop by Money Beagle and let me know if you’ve had any experiences of your own that led you to track this very important measure of personal finance health. And, if you’re not tracking this, start tracking your cash flow today!