While balancing the family checkbook one day, one of my friends looked at her husband and said, "We're broke." Their baby daughter, sitting on the floor and soaking up every new word like a sponge, repeated: "We're broke." The one-year-old said it over and over—"Broke broke broke broke"—until my friend and her husband dissolved into laughter.
Unfortunately, assessing your household's inflows and outflows won't always be as lighthearted, and you may need to adjust your lifestyle to create a healthier pattern. (Thankfully, my friend's financial pickle was short-lived, and her daughter picked up a new word.) But checking up on where your money goes over a specific period of time—often referred to as creating a personal cash-flow statement—is an essential step when creating a financial plan. Your personal cash-flow statement can help you spot trends in how you're spending your money and whether you're saving enough, make sure your spending is aligned with your priorities, and develop a budget.
Whereas your net worth statement (Chapter 1) summarizes the assets and liabilities that you've accumulated to date, your cash-flow statement captures how you use your money on an ongoing basis. The cash-flow statement shows you what cash comes into your household—through the income from your job and other sources—and what money you're spending or saving.
You can create a cash-flow statement for one month, one year, or any other period you like. Many financial ...