Have you ever looked at your bank account statement and wondered where all your money went, or have you open your credit card bill and been shocked by how high it was? If you find yourself surprised by how much you spend on a regular basis, you're not alone. Tracking your cash flow can help avoid those unpleasant surprises. In this lesson, you'll learn how to calculate your free cash flow, which really just means how much is left over every month after you pay your expenses. I'll also share ways to improve your free cash flow. We'll also talk through the connection between free cash flow and net worth. Spoiler alert, the more free cash flow you have, the more likely it is that your net worth will grow over time. Here's how to figure out your free cash flow. Add up all of your income for the month and subtract all of your expenses. That amount left over is your free cash flow, and those are the dollars that can help you make progress on your goals. Your income includes earned income from work, whether that's a salary, hourly pay, or 1099 income as an independent contractor. It also includes interest from savings accounts, dividends from investments, Social Security Benefit Payments, and rental income from investment properties. If your income is higher from time to time due to bonuses, tax refunds, or seasonal work, your free cash flow will be higher. But let's focus on your regular monthly income for now. If you get paid semi-monthly, you receive two paychecks each month, so double your paycheck to find your monthly income. If you're paid biweekly, like every other Friday, for example, you end up with two months of the year with three paychecks instead of two. But I'd still recommend budgeting on two paychecks monthly. If you have less consistent income, use an average monthly number. Now, that you know your income, let's focus on your expenses. This includes your rent or mortgage payments, utilities, insurance, groceries, gas, as well as your discretionary spending like dining out entertainment clothes, and online purchases. The best way to identify all your expenses is to look back over your bank statements for at least the last three months. Don't worry about trying to categorize every line item, but do try to look for trends and averages to get a sense of what you spend. Once you have identified your expenses, add them up to get your total monthly outflows, subtract your total outflows from your total inflow for your net cash flow number. Let's do a quick example together. Let's say your net paycheck is $2,000 and you get paid twice a month and your job is your only income source. This means you have monthly inflows of $4,000. You spend $1,200 on rent, have a $300 car payment, $200 payment for student loans, pay $150 for insurance, spend $400 on groceries, $200 on gas, and about $1,000 on discretionary items like streaming subscriptions, food delivery, a gym membership, travel, et cetera. If we add all of these expenses together, your total outflows are $3,450. Your total inflows of $4,000 minus the outflows of 3,450 gives you a net monthly cash flow of $550. In this example, you have a positive net cash flow of $550. A positive net cash flow is also known as a surplus. Having a surplus means that you earned more than you spend and therefore have the ability to save and watch your net worth increase month over month. Conversely, a negative cash flow, also known as a deficit, shows that you spent more money than you brought in. Having a negative cash flow may mean you're eating into your existing savings or you're accumulating debt. In either of these scenarios, you can expect your net worth to decrease over time if your monthly net cash flow remains negative. Calculating and understanding your cash flow can help you better plan your budget and set realistic goals for increasing your net worth.
