Do You Know How To Calculate Your Inflow To Outflow Ratio?
Your basic cash flow is just your regular monthly expenses subtracted from your regular monthly income. Using the same data, you can also determine your inflow (income) over outflow (expenses) ratio. This is a slightly more complicated metric that can give you a better idea of your financial position.
To calculate this ration, simply take you monthly income and divide it by your monthly expenses. This will provide you with a precise number that you can use to guide your actions. For example, if you had an income of $8,000 a month and expenses of $4500, your ratio 1.77. If your income is $3,000 a month and your expenses are $1,800 a month your ratio is 1.66. Having a ratio of 1.2 or higher is ideal and the hire your ratio is the better. The metric can be broken down like this:
0.8 and Lower. If your inflow to outflow ratio is 0.8 or less, then you are living well beyond your means probably in financial trouble. In order to compensate for the shortfall, most people in this situation resort to borrowing, frequently on their credit cards. If you are in this position, it is past time to start looking at making major adjustments to your lifestyle and expenses because staying in this position will inevitably result in a financial disaster. You may or may not already be in a desperate situation between maintaining your lifestyle and servicing your debt, but if you have not already reached a crisis point it is only a matter of time until you do.
0.81 to 0.99. In this range, it means you are spending more than you should be, but it is probably manageable and does not necessarily mean a crisis is inevitable. People with good credit ratings and responsible habits can maintain this position for a very long time, but it also means that there will always be a degree of financial pressure. Further, it means there is no leeway for a sudden unplanned for expense, such as a medical emergency. People in this situation can usually make some fairly minor adjustments to their lifestyle and spending habits to push them into the next range.
1.0 and Higher. At the ratio of 1.0 you are officially making more than you are spending, which is obviously a good position to be in. The higher your inflow to outflow ratio is, the better your position. For example, if it is 2.0, it means you are currently bringing in enough money each month to cover the expenses for two months. People with a ratio of 2.0 or higher should seriously consider their investment options as this surplus provides a sound basis for continued wealth building.
When you take a look at your inflow to outflow ratio, you begin to get a better look at your current financial position. This will help you decide the best course of action for your future. One think to remember is that your ratio will change as often as your income and expenses change. For this reason, it is a good idea to calculate your ratio often.
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