If money seems to disappear from your bank account nearly as soon as it arrives, you may have a cash flow problem.

Cash flow is the movement of money into and out of your accounts. While cash flow is a common term within the business world, it applies to your personal finances too.

If you don’t yet know how to calculate your cash flow, learning can help you better manage your money. For instance, knowing your cash flow can help you make smart budgeting decisions and ensure you make progress toward your savings goals.

And don’t worry — you don’t need a calculus degree to figure this out. Continue reading to learn the simple equation for calculating your cash flow and why it’s so important.

Cash flow is the movement of money into and out of your bank account. A positive cash flow means more money enters your bank account than leaves it, allowing your balance to grow over time. A negative cash flow is the opposite — you’re spending more money than you bring in. Positive cash flow is the goal because it allows you to save money for the future.

Several types of transactions can contribute to your cash flow, broken up by “inflows” and “outflows.” Inflows might include income from a W2 job, self-employment, rental income, or other investments. Outflows include all of your expenses, such as housing, utilities, groceries, debt payments, clothing, entertainment, and more. Your cash flow is equal to your inflows minus your outflows.

Why is it important to understand and track your cash flow?

Understanding and tracking your cash flow isn’t just crucial for businesses — it’s important for any individual who wants to keep tabs on their financial health.

For example, say you have a negative cash flow every month, but you don’t realize it. Eventually, you’ll empty your savings account and need to take on debt to cover your expenses.

However, if you keep a closer eye on your cash flow, you’d notice that you’re spending more than you earn every month. Knowing this, you can take action to improve your cash flow, such as cutting discretionary spending, getting a roommate to help with rent, or negotiating a raise at work.

Unlike some financial calculations, finding your cash flow is simple. To calculate your cash flow:

1. Add up all your sources of monthly income.

2. Then, add up all of your monthly expenses.

3. Last, subtract your total monthly expenses from your total monthly income.

Say your income or expenses vary each month. In that case, you can calculate an average monthly cash flow by adding up several months of income and several months of expenses, finding the difference, and dividing by the number of months.

To illustrate what a cash flow calculation looks like, here’s an example:

Say you earn $4,500 per month after taxes. You also have a side hustle that generates $1,200 in monthly income.

Total monthly income: $5,700

Your typical monthly expenses are as follows:

• Rent: $1,500

• Utilities: $200

• Groceries: $400

• Transportation: $500

• Insurance: $300

• Student loan payment: $200

• Household and clothing: $200

• Dining out: $300

• Fun money: $200

• TOTAL: $3,800

Next, subtract your total expenses from your total income: $5,700 - $3,800 = $1,900

Cash flow = $1,900

With a positive cash flow of $1,900, you have money left over each month to save or invest. For example, you might decide to invest $800 for retirement, put $800 toward a down payment savings account, and put the remaining $300 into a travel fund.

If you calculate your cash flow only to find a negative number, it can be discouraging. However, there are some things you can do to improve your personal cash flow over time.

If your spending in certain categories consistently exceeds what you plan for, budgeting may help. A budget can help you proactively plan for and track your spending. So if you’re halfway through the month with only 10% of your fun money left, you know it’s time to cut back.

When creating a budget, you may find you’re spending a lot more than you realize. If that’s the case, cut down on spending where you can. Though discretionary spending is usually the easiest place to cut back, you can also see if there are ways to reduce your essential expenses. For example, you could get a roommate to save on rent and replace your new car with a fully paid-off older model.

There’s only so much you can cut from your expenses without living in a state of constant deprivation. That’s why it’s also helpful to focus on growing your income. This could look like negotiating a raise, applying for a higher-paying role, or even starting a side hustle outside of your day job.

Save and invest first

If you’ve heard the phrase, “pay yourself first,” but never took it to heart, it may be time to follow this advice.

Paying yourself first means prioritizing your future by immediately contributing to your savings and investment accounts — ideally using automatic contributions — before paying other bills. This ensures you aren’t short-changing yourself at the end of the month. Paying yourself first may force you to cut back on discretionary expenses, which can be helpful for those who struggle to do so on their own.

You can calculate your monthly cash flow by totaling your monthly inflows, totaling your monthly outflows, and subtracting the total outflows from the total inflows. Inflows include any form of income, and outflows include bills and other monthly spending.

There’s no specific healthy cash flow number, but generally, a positive cash flow is best. Having a positive personal cash flow means your income exceeds your bills, and there’s money left over for saving and investing. The bigger your savings and investment goals (or the shorter your timeline), the more advantageous it is to have a bigger cash flow.

Cash flow tells you the net movement of money into your accounts every month. For example, a positive cash flow tells you that you earn more than you spend. This means you have money left over to stash in a savings account or invest for the future. If your cash flow is negative, that means you spend more than you earn, and unless you change your habits, you’ll eventually deplete your savings.