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 accountâ€™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?