How Your Personal Cash Flow Works

“It’s not how much money you make, it’s how much you keep” – Robert Kiyosaki

With the first two months of 2023 in the rearview mirror, there is no better time to strategize your cash flow for the rest of 2023. If you feel like you don’t have control of the steering wheel regarding your finances, understanding and planning your cash flow is one of the best ways to gain control. We will cover the basics on understanding your income and expenses to determine whether your cash flow is positive or negative. Once you understand if you are positive or negative you can plan for the future by increasing saving or decreasing expenses.

Let’s start with the two types of income: W2 and 1099. W2 income is for employees who are salaried; this might be hourly or annual salary and could include a bonus, or more complex compensation packages like Restricted Stock Units. 1099 income could be people that are self-employed or working in a commission-based industry.

For W2 employees, look back at your 2023 final pay stub. You will find your gross pay, deductions, taxes, and net pay year-to-date. Take the net pay number and divide it by twelve months to see your monthly take-home income.

If you earn 1099 income, this requires a little more work; look back at your 2021 taxes (unless you’ve completed your 2022 taxes) and look for your adjusted gross income, line 11 and subtract your total tax, line 24. If you have State income taxes, deduct the total tax owed to the State. This should be your net income after deductions minus your tax payments. If you and your spouse have two different types of income, this is a little more complicated to separate. For the W2 worker, use the previously mentioned step. For the 1099 person, divide your total tax line 24 by your adjusted gross income line 11 to get a tax rate. Subtract one minus that percentage to get your net after-tax take home, and multiply that percentage by other income lines 9 of the tax return to get your 1099 net income.

Let’s assume the examples above the number for net income is $10,000 per month or $120,000 per year for both the W2 income and 1099 income.

The next step is to figure out your expenses. The simplest way to do this is to look at your bank account balance one year ago and then see what it is today. So if your bank account was $26,000 on January 1st 2022, and on December 31st 2022, it was $50,000, you have roughly $2,000 per month in free cash flow and spend about $8,000 per month in expenses. I like using a time period of one year as a starting point; once you have that, do quarterly check-ins. For 2023, at the end of March, review your starting balance on January 1st 2023, and then compare that to your March 31st balance.

If you are nearing retirement, this is where I think going through a detailed budget could be worthwhile. There are a lot of resources out there for budget worksheets; this is the NerdWallet Excel Spread Sheet or this worksheet from the Federal Trade Commission.

Now that you know your monthly cash surplus or shortage it becomes easier to plan for your financial goals. If you have a cash flow surplus of $1,000 per month and are behind on retirement planning, you can increase 401(k) contributions by $800 per month to still keep a little buffer on monthly cash flow. If you have a shortage, it is easier to make little adjustments, short $200 per month, go out to dinner twice a month instead of four times a month. Saving for a home and need an additional $48,000 in cash? Find a way to save $2,000 per month so you can start looking next year.

If this topic is overwhelming for you, don’t worry; reach out to a financial planner who can help you review your cash flow and objectives.