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Often thought of as a business document, a cash flow statement is actually a age old tradition of Dutch families to balance their family budget. Once an image of an woman writing down her grocery expenses at the kitchen table, now an essential spreadsheet to have to keep control of your financial future. Let’s have a look what makes a good cash flow statement for your household budget.
“Never take your eyes off the cash flow because it’s the life blood”
– Richard Branson
Where to start
Anyone can make a family cash flow statement, you don’t even need a computer, a pen and paper was enough for those before us – but I prefer the flexibility of a spreadsheet, also my handwriting is terrible!
All you need is detailed information on your income and expenses, salary slips, invoices, bills or bankstatements (internet banking). I personally would recommend to update this at least on a monthly basis. In my experience with helping others to get started on these, the longer you wait – the bigger the pile gets that needs to be processed and you less likely to get started.
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What is in cash flow statement?
In short, anything that relates to money changing hands, whether it is money coming or going, cash or electronic – everything should be recorded in order to get a good grip on your cash flow. In general it is distributed into two categories, unsurprisingly, money coming IN and money going OUT.
For me a third category would be money SAVED. Although strictly if we are going to steal this concept from business accounting, saving should be part of the expenses (OUT) and IN/OUT categories should be in perfect balance (IN = OUT). Either way is fine by me!
What's the difference with a budget?
Short answer is that a budget is a promise you make, and a cash flow statement is the reality of what happened, regardless of the promises made. A budget is great to look ahead, a cash flow statement is primarily looking back at what happened.
In my personal household budget – I combine having a budget and a cash flow statement in one document, promises made and promises kept (or broken). It helps me also to highlight my expectations and see where those expectations fail to meet reality. This is a good start to find out whether the expectations were wrong, or perhaps my spending went awry.
Let’s look a bit more into detail into the what kind of subcategory you can find in a cash flow statement for your household budget.
For the average household, the income side of a household budget will be the easier of the two. It’s main component would be work-related income, such as salary and/or commissions, bonusses and the like. This can also of course be income related to your business, but I personally would keep some separation between the household and business budget.
Personally, I like to subdivide workrelated income based on its origins, like is it basepay only or does it include reimbursements or other aspects typically found in a paycheck. I also like to divide it between my income and that of my partner, but of course that is not a requirement, you can simply put the number that comes in as a whole as well. More details tend to give better insights is my opinion. One year, I decided to put my gross salary and also count how much taxes I’d be paying – I stopped doing that, as it was too depressing to see on paper every month.
Now other types of income can be more passive income, like bank interests, or dividends on your brokerage accounts (personally, I feel it’s better to keep money from your brokerage accounts like dividends separated from your household budget as not to be tempted to spend it, but again that’s personal). If you are already in a bigger budget category, you might also include income from your rental properties here, of course. A bit of an outsider, but for a lack of a better location, alimony is of course also a source of income that is passive and should not be forgotten if your receive it (it’ll be an expense if you’re the one paying of course).
Lastly, a bit dependent on your geographical position I suppose, but definitely applicable in the Netherlands is government related income. This can take different forms, but think about rental support (‘huurtoeslag‘), health care support (‘zorgtoeslag‘) or for those with children perhaps a day care support (‘kinderopvangtoeslag‘) and government child support (‘kinderbijslag‘ and/or ‘kindgebonden budget‘). For most of these, at least in the Netherlands, there will be an income dependent decrease – the more you earn, the less you get, but still good to add them if you receive them. No matter how low or high your income, you can benefit from a household budget!
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This is the part where most lose interest in keeping up month to month. Where your income might not really be all that different every time, expenses can be a drag to write down, especially if you love to shop. Well there’s benefit number one, maybe you’ll shop less, just so you’ll have less to write down! All jokes aside, which I am sure sound terrible on paper, expenses come in two main flavours, fixed expenses and variable expenses and especially the variable expenses can be a handfull when trying to keep track.
My tip on this, don’t use too much cash. While there are significant psychological gains from a financial perspective to use cash – the main one is that actually gives pain signals in the brain(!) – there are also some downsides, for one it is easier to lose money, to get robbed etc. But all of that aside, for this topic it is just hard to keep track of every coin spend. Use technology to your advantage and have the bank keep a record for you. Most of them even already allocate them to specific categories (although I still prefer to put them into my spreadsheet for personal awareness, it doesn’t help you if the bank is the only one that knows where your money is going!).
In reality, both fixed – and variable expenses come together in common themes – such as Living or Housing, which includes mainly fixed expenses such as mortgage/rent, utilities and insurances but also perhaps less frequent taxes or more variable expenses such as those made for redecorating the house. Adjacent to Living is the theme Household, which includes more variable expenses such as cloths and groceries, but these could also be relatively fixed depending on how predictable your expenses are.
Next, depending on your life choices and phase might be a theme related to kids and/or pets, where expenses related to day care or gifts and clothes can be written down. If you are very detailed food and other related expenses could be noted here, but probably this will be combined more with your general household expenses.
Next theme, I would like to call Medical, which would include health insurance and other health related costs, but also for instance life insurance if you would have that.
Next, we come to expenses related to the theme of Transportation, which includes any expense related to cars, buying them, renting them, car insurance, taxes, parking fines, but also costs related to taking a taxi of bus fees. You might consider also putting a category to reserve money specifically for buying a new car (better to have the money ready and reserved when the time comes, protip!). Personally I have a seperate section related to reservations for future expenses, this includes home maintenance, buying a car and several other need to have reservations – NEXT to having a emergency budget for if those expenses come before I have the money ready.
Depending on personal preferences whether you would put it into the Household theme or not, I prefer to keep the next one separate and that is the theme Saving & Investing. Of course, this is where you can put how much you’ve ‘spent’ to save and invest – comes down to personal taste as I’ve mentioned in the beginning, I only put my investments down as an expense, seeing investments as money spent, makes it easier when the market is going down (pro-tip!). This theme also includes any type of banking fee, loan pay-backs (except for mortgage) and insurances not covered in Living, Medical or Transportation.
Last, but certainly not least, although sometimes underestimated in importance in the lives of frugal people – Leisure time! An essential theme, for which you really should look into spending up to 20% of your budget into, according to various budget guru’s. It’s one that I need to work on myself, as we’ve just not been spending enough on this particular theme – but then again, we have fun without spending money (fortunately!).
This last theme can include anything that you do for fun, think of outings, entertainment like books or (video) games, going out for dinner, hobbies, but also education and courses that you might like. Go on, enjoy a bit!
“To measure is to know. If you cannot measure it, you cannot improve it. When you can measure what you are speaking about and express it in numbers, you know something about it.”
– William Thomson, 1st Baron Kelvin
I cannot stress enough how crucial this financial hub has been in the improvements of my financial journey over the last couple of years. If you want to give it a go, also try to combine it with my money tracker, to visualize improvements in your cash flow, after all a better cash flow is the ultimate secret to wealth building.
I use this household budget as the centre of my financial plan, it is where I set up my budget, where I track my money – it even keeps track of my savings rate, my net worth and my financial health to a certain extent. Upgrading and improving it has been the main driving force to learn more about finance in the first place, “To measure is to know”!
If you have a household budget? What do you include in it? How much time does it take you to maintain it? If you don’t have a household budget? Why not!?
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