Create a Personal Cash Flow Statement

As 2018 winds to a close, this can be an excellent time to review your financial situation and begin making plans for the new year.  Looking back at the previous year to see how much money came in and where it went during the year without adjusting for seasonal variations.  The knowledge you can obtain by creating a personal cash flow statement can help you make realistic financial plans for 2019.  (If you’re married or cohabitating, you can use this technique to create a household financial statement.)

Tabulating Income

Begin the process by adding up all the spendable cash that came in during 2018.  Typically, that information can be found in the monthly statements from your checking account(s).  If you haven’t kept all the monthly statements, of if you don’t feel like juggling all the paperwork, you can probably retrieve your prior year’s bank statements online from your bank’s website.

If you are an employee, you probably have your paychecks deposited directly into your account (after various deductions); if you are retired, your Social Security checks go there, along with any pension you’re receiving.  Self-employment income and investment income paid by checks also will show up as deposits, as well as transfers from investment or savings accounts.

Generally, only cash income (payments in currency) won’t show up in a statement from a bank or investment account.  If you do receive meaningful amounts of cash regularly, you should have some idea of the total.  In fact, you’ll need records in case the IRS questions how much cash you’ve received from working during the year.

Once you’ve calculated all the income you’ve received, make any necessary adjustments.  Subtract inflows not likely to recur in 2019, such as significant gifts, bequests, asset sales, and so forth.  Altogether, you’ll have an idea of how much cash flow you can expect in the upcoming year, raising or lowering the amount to account for current circumstances, such as a higher salary.

Tracking Your Outlays

Your bank statements will also show how much you’ve spent during the year: checks written, bills drafted automatically, and cash withdrawals at the teller window for spending money.  Be sure to include ATM withdrawals as cash disbursements for 2018, even if they were linked to an account other than your regular checking account.

To complete the picture of what you spent during the year, request annual statements from your credit card companies.  If you paid less than the total monthly balance, your outstanding credit card debt may have increased during the year.  While this is not uncommon, just remember that most credit cards carry double digit interest rates and the interest is a non-deductible expense for tax purposes.  As such, paying down any credit card balances should probably be a top priority for 2019.

Focus on the Future

Once you have calculated your cash flow from last year and the amount you spent, you can make certain plans for the upcoming year.

Example 1:  Steve and Sue Smith had $150,000 of cash receipts last year and $130,000 of expenditures.  The Smiths contributed a total of $2,000/mo. to their 401(k) plans in 2018, or $24,000 total.  Reviewing their cash flow, the Smiths see they’ll be able to increase retirement savings by $20,000 in 2019 without crimping their lifestyle.  Therefore, Steve and Sue plan on boosting their 401(k) salary deferrals in the upcoming year.

On the other hand, this procedure can be valuable to show you that a cutback is necessary, and where to trim the fat.

Example 2:  Jim and Joan Jackson also had $150,000 of cash receipts but they spent $170,000 last year, in addition to adding to their credit card balances.  Reviewing their annual cash disbursements (cancelled checks and credit card summaries), the Jackson’s were surprised to learn how much they spent on dining out and online merchandise purchases.  They decide to rein in all their outlays, especially in those areas, and pay down their credit card balances.

Creating a personal or household cash flow statement can start your year off with a greater grasp of your finances.  In addition, this exercise is an excellent way to begin gathering the data you need to prepare for your 2018 tax returns.

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