Before You Invest, Calculate Cash Flow

FINRA
Before You Invest, Calculate Cash Flow
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Calculate your monthly cash flow. © iStockphoto/DNY59

Before you invest for the long term, know where you stand today. An important step is to calculate your monthly cash flow to see if you have funds to invest.

Start by getting a handle on your monthly net income—the money you take home every month after taxes. This includes your salary and other steady and reliable sources of income, such as money from a second job, child support or alimony that you receive, or social security. If you already own some investments, you may receive dividend or interest payments. All of these income streams contribute to cash flow.

Next, calculate your monthly expenses. These include your rent or mortgage, car lease or loan, personal loan, credit card and child support or alimony payments. Also include money for groceries, utilities, transportation and insurance. Don't forget money that you spend on items that are "discretionary," rather than necessary. Do you have a cable bill? How about a gym fee? Also add in money spent on clothes, gifts, and entertainment. Average your actual expenses over a three-month period to come up with a reliable monthly estimate.

Then, subtract your monthly expense figure from your monthly net income to determine if you have leftover cash. If the result is a negative cash flow, that is, if you spend more than you earn, you'll need to look for ways to cut back on your expenses before you can consider investing. If the result is a positive cash flow, but your spending nearly equals your earnings, it might be too soon to start investing right now.

To invest, your net income must exceed your expenses—with some room to spare. If this is not the case, look for expenses you could eliminate or reduce. Maybe some of your discretionary expenses are luxuries that you could give up. Perhaps a debt refinancing or consolidation could reduce your monthly payments. A financial professional may be able to help you with these matters.

Use FINRA's worksheet to calculate your cash flow.

Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA).

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