Create a Personal Cash Flow
As the year begins, this can be an excellent time to review your financial circumstances. You can look back at 2014 and see how much money came in and where it went during the year without adjusting for seasonal variations. The knowledge you’ll obtain by creating a personal cash flow statement can help you make realistic financial plans for 2015. (If you’re married or cohabiting, you can use this technique to create a household financial statement.)
Begin the process by adding up all the spendable cash that came in during 2014. Typically, that information can be found in the monthly statements from your checking account or accounts. If you haven’t kept all the monthly statements, or if you don’t feel like juggling all the papers, you probably can retrieve all of last year’s statements online from your bank’s website. If you are an employee, you probably have your paychecks (after various deductions) deposited directly into such an account; if you are retired, your Social Security checks (after Medicare deductions) 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 occur again in 2015, such as exceptional gifts, bequests, asset sales, and so on. Altogether, you’ll have an idea of how much cash flow you can expect in 2015, raising or lowering the number to keep up with current circumstances, such as a higher salary this year.
Tracking your outlays
Your checking account statements also will show how much you’ve spent during the year: checks you wrote, bills you paid automatically, personal checks that you cashed for spending money. Be sure to include your debit card or ATM withdrawals in the money you spent during 2014, even if they are 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 your credit card bills are not on autopay and you’ve paid less than the total balance, you may have increased your outstanding debt during the year. Credit cards usually charge double digit interest rates, and the interest you pay is not tax deductible, so paying down any balances (or converting to deductible home equity debt) probably should be a top financial priority for the year.
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 2015. Example 1: Steve and Sue Smith had $150,000 of cash flow last year and $130,000 of expenses. The Smiths contributed a total of $2,000 a month to their 401(k) plans in 2014, or $24,000 in all. Going over their cash flow, the Smiths see they’ll be able to increase their retirement savings by $20,000 in 2015 without crimping their lifestyle. They plan to boost their 401(k) salary deferrals this year. On the other hand, this procedure can be valuable to show you that a cutback is necessary, and where to trim. Example 2: Jim and Joan Jackson also had $150,000 of cash flow but they spent $170,000 last year, in addition to adding to their credit card balances. Going over their cancelled checks and their annual credit card summaries, the Jacksons 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 2014 tax return.