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Sure, cash flow may sound like a complicated financial term only your accountant uncle would truly understand, but it’s actually a straightforward concept—it’s simply how much cash you have coming in (aka your income) minus how much cash you have going out (your expenses).

If this number is positive each month, hats off to you. You’ve got some extra cushion to put toward debt, move into savings or treat yourself to something fun.

Building the right budget

The best (and simplest) way to manage your cash flow is to set a budget. At its core, a budget is like a road map for your money, guiding it to various destinations and tracking what you plan to earn and spend (and what actually happens).

The best-laid plan

  • You’ll first set aside savings. A good rule of thumb is 20 percent of your take-home pay toward all savings efforts (financial confidence account, other savings accounts, retirement, etc.).1
  • Then you’ll pay fixed costs (like rent, utilities, student loans). Ideally, this should be about 50 percent of your monthly income.
    • Tip: Your housing costs (rent or mortgage + insurance + taxes) should be no more than 30 percent of your income. If you’re paying more than that, it may be time for a change.
  • Use whatever’s left for discretionary items (like food and entertainment).

The reality check

A budget can be a really powerful tool for learning about and managing your cash flow—but only if used correctly. If you don’t track what you’re actually spending, then the numbers you planned for in step one are just theoretical.

But that raises the question … once you know your plan, what’s the best way to keep your spending activity straight? 

Financial experts stress that there’s no one-size-fits-all way to budget. You may prefer an online site to track your spending, whereas your best friend may keep a detailed Excel spreadsheet and your co-worker jots everything on a legal pad. “It may help to try at least two different systems to find whatever is going to work for you,” says Shannah Compton Game, a Certified Financial Planner (CFP®) who specializes in working with millennials. 

Some budgeting apps can link to your checking and credit card accounts and automatically track much of your spending activity that way. Then you’ll just need to verify the charges and add anything you spend in cash.

Whether you opt to track your budget by hand or through an app or spreadsheet, there are really no hard and fast rules as to how often you should update your budget. Anywhere from once a day to once a week works, as long as you’re accounting for all of your transactions. But Compton Game does recommend trying to make it a rewarding experience.

“I encourage people to set money dates,” she says. “Handle your budgeting tasks with a latte or when you're relaxing, getting your nails done or doing something that brings you some joy. 

Evaluate and evolve

Once you start paying more attention to where your money is going, you may realize it’s time for some changes. If you’ve never really been disciplined about your spending, it can take some getting used to.

“It’s a state of mind and having the sense to say no to yourself when you need to,” explains Kristen Euretig, Certified Financial Planner (CFP®) and founder of an organization that helps young women gain control of their finances. “You need to know that you can’t always go out to dinner and get new shoes and take your friend out for her birthday. It’s a give and take.”

Fact: If you’re accustomed to living in the moment, you’re not alone. Compared with other generations, millennials spend more of their budget (over 6 percent) on dining out.2 What’s more, 35 percent admitted that dining out is the biggest culprit when it comes to overspending.

Luckily, there are small changes you can make to better shape your spending habits. 

Challenge: Check your bank statements for monthly subscriptions that you may not be using or recurrent donations you may want to reduce (or cut off).

And one final tip: Remember that after you take care of your planned budget items, you should be left with a little fun money (positive cash flow!). Compton Game suggests treating yourself to a small reward every month if you stick to your budget and stay in the black.

“You won’t necessarily go out and buy a new big-screen TV, but having some sort of motivation—the human psyche loves that,” she says. “When you know you’re working toward something, I think it really helps you stay motivated to do it. 

3 Key Takeaways
  1. Cash flow is simply your income minus your expenses.
  2. When used to plan and track income and expenses, a budget can be an effective tool.
  3. A good rule of thumb is to save first, then pay fixed costs before using what's left for discretionary items.

Challenge yourself

What can budgeting really do for you? Keep reading to see the benefits—and the potential ways to make it work.

1 “New To Budgeting? Why You Should Try The 50-20-30 Rule,” July 11, 2016, Forbes/Trulia

2 “Spending Habits by Generation,” Nov. 3, 2016, U.S. Department of Labor

3 “Principal Financial Well-Being Index: American Workers,” November 2016, Principal Financial Services Inc.

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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