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Each Monday morning, I plan to post my thoughts on Organizing Your Finances. Through this series, I hope to share a tip or two that address a common problem that many of us face in our daily lives — that of organizing our finances. I’d love to hear your thoughts on this initiative and would love it more if you could share a tip of your own. And, as always, do spread the word if you find this useful.
I have written before on the concept of having a single source of truth for your finances. The basic idea here requires you to have:
A savings account from which you conduct transactions across the four core financial categories — income, expenses, investments, and savings — each month. At the end of each month, you review this account’s statement and you have a clear idea of your financial dealings.
I’ve been following this system for quite some time now and have found that it works very well. I now have a clear picture of where my money is coming in from and where my money is going out to. Further with this system in place, I also know what my free cash flow is each month. I simply calculate my free cash flow using the formula:
Free Cash Flow = Free Cash Flow (brought forward from the previous month) + Income – Expenses – Investments (for medium and long-term goals) – Savings (for short-term goals)
I can now use this free cash for anything that I want to — since all my expenses and goals have been monetarily accounted for. It’s honestly liberating to see a positive number here.
How about you? Do you have such a system in place? Do you know what your free cash flow is?
Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.