Step 2Now that you have created a balance sheet you’re probably looking at the number, your net worth, and a whole lot of emotions and questions are racing through your mind. You’re probably thinking how did I get here? Where did all my money go? In some cases I’ve seen people say that they thought they were doing so well but now we are just depressed. Hopefully the number is positive but don’t worry if it’s not, you have to start somewhere. Don’t fall victim to those negative thoughts!

It’s just a number on a page don’t let it define you. A number is neither good nor bad.  The only importance and meaning that it has, is the meaning we give it. If the number is negative you can change it! If the number is positive, it doesn’t necessarily mean you are in good shape. Remember it’s just a number and this process will help you come to terms with it and show you were you can do better.

Remember, knowledge and understanding is one of the best ways I have ever found to relieve stress and I know it will work for you too.

Now, what’s next? The second step when examining today is to create a cash flow statement. Trust me, this won’t take you long and it is as important, if not more important, than developing your balance sheet. The cash flow statement is where you will see why that number we talked about above is where it is. It will show you if your net worth is going up… or going down. It is the sum of all decisions in life that you have made so far when it comes to money so it is worth taking seriously.

Again, I have attached an excel spreadsheet to this post that will help you make this process easier.

Cash Flow Template Download

The first step is to look at your income as this is where everything flows from. Most people think of their income as what gets deposited to their account on pay day.  But when I talk about income, I mean your full income, before any deductions and taxes are taken off, what’s referred to as your gross income.  The reason it’s important to look at the gross number is because that is your actual earnings, the taxes taken off are an estimate. Most people are unaware that this isn’t a fixed number but we will talk more on that later.

Another reason it’s important to know your gross income is so you know what’s being deducted and what hidden expenses you have. Sometimes you are paying for benefits that you don’t need or contributing to a retirement plan that isn’t tax efficient. Again, accuracy here is important because this is your starting point!

If you are paid commission or a variable salary with bonuses, take your annual income from last year and divide it by 12 to get your monthly income. If you are salary or hourly, look at your gross pay on your pay stubs. If you get paid every 2 weeks, multiply that number by 26 and divide by 12, if you get paid twice a month just add 2 pay periods together.  It’s important to get a monthly number.

Also, when calculating your income, make sure to add a line that includes any other sources of income.  Such as rental income from property or investment income from a savings account or dividends earned.  Include all income that you receive on a regular basis.

The other side of your cash flow statement is for your expenses.  Again, this is something that you want to 30553199_slook at on a monthly basis. If you pay for anything like car insurance or house insurance on an annual basis, divide the total cost by 12 to get your monthly number and put that on the sheet. Same goes for any utility bills that you pay on less then a monthly basis.

Include things like your gym membership, car insurance, mortgage payments, loan payments, life insurance premiums, cable, phone, internet, heat. Anything you have to pay on a regular monthly basis. Do not include your credit card payments though, I’ll explain why later but for now we just want to get an idea of your fixed expenses.  And don’t forget those deductions on your paychecks. How much do you pay for your benefits? Do you pay anything for health insurance? In British Columbia we have MSP that we pay monthly for instance

Once you have all your fixed monthly expenses figured out, print off 3 months of bank statements and add up all of your other spending by categories: clothing, food, entertainment and so on.  Then convert those to monthly expenses. This will give you a good idea about what you spend on average, because those cost can vary. If you have a Tim Hortons or Starbucks habit I would suggest adding those up in their own category, do the same for anything you regularly treat yourself to. It’s important to add up fast food as well as restaurants/bars as separate expenses from groceries. .

Also, make sure to include a savings category, do you contribute to a work pension plan? Do you have any automatic savings deductions coming out of your account?  Make sure you add them all up and include them as an expense line.

For some, categorizing your expenses is done for you by your bank automatically or you might be tempted to use a site like While I do recommend using a site like going forward, for this exercise, it’s important to do it by hand.  It will give you a better understanding of what you spend, and it will allow you to be more accurate. This is something you should only have to do once, after that online programs can fill the need.

Once you have accounted for everything you spend money on, add up all of your expenses so you get a monthly figure. Now compare that to your income. Is the expense number bigger than your income number? If so, this is a huge problem and it is why you are in debt and this must be addressed immediately!  This situation cannot last for long and it will continue to cause you stress and anxiety until it is fixed.

If your life is costing you more then you make it’s time to take a hard look at your lifestyle and realize something needs to change.

If your expenses are lower than your income, the difference is what you have for “disposable income”. This is a good starting point because now you have to ask yourself, what am I doing with this disposable income? For many of us, even though on paper we have extra every month, our bank account is empty by the time we get our next pay cheque so now’s the time to account for that missing money.

Once you have your cash flow number it’s time to evaluate. Are you happy with the life you have? Are you doing what you want to be doing with your free time? Is this number big enough to do what it is you truly want?

These are important questions to think about. These 2 exercises, creating a balance sheet and a cash flow statement, are not meant to bring you down.  They are meant to get you to evaluate your financial life, and by extension, the rest of your life. They are meant to help you understand where you are and how you got there.  They are meant to start the process of asking yourself to truly evaluate what it is you are spending your money on and whether or not you are getting value for the dollars that are going out. What you actually spend your money on is less important than understanding and realizing the value you get for the expense.

This is your starting point, it’s where everything begins. Print these sheets off, post them somewhere you can see them, keep them in your pocket if it helps. Use them as inspiration to improve where you are so you can get to where you want to be tomorrow!

Cash Flow Template Download