Personal Budgeting – Calculating 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 get this ratio, you take your regular monthly inflow and divide it by your regular monthly outflow. The precise number given provides you with a better guide for what actions may be appropriate. As an example, if your total monthly income from all regular sources is $5,000 per month and your total monthly expenses (including regular but voluntary expenses) is $4,000 per month; your Inflow to Outflow ratio is 1.25. On the other hand, if your monthly income is $5,000 but your monthly expenses are $6,000 then you have a ratio of 0.83, meaning you are spending more than you should be. Having a ratio of 1.2 or higher is ideal and the higher it is, the better off you are.  This metric can be broken down as follows:

0.8 or Below – If your ratio is in this range, it is critical that you act fast to rectify your financial situation.  You are currently living beyond your means and are forced to borrow money to maintain your lifestyle.  You need to make lifestyle adjustments and seek alternatives to earn extra income immediately.  You may already be experiencing financial crisis.  If not, you are headed there…fast!

0.81 to 0.99 With a ratio in this range, you are still in the position of overspending.  The good news is that financial disaster is not imminent.  The bad news is that you have no room for a financial setback, such as a job loss or medical emergency.  While you will have continued financial pressure, as long as nothing unforeseen happens and you still have good credit, you can probably maintain this position for some time.  And, if you are serious about taking control of your finances, a few lifestyle changes may help you jump into the next category.

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.

By taking a look at your inflow to outflow ratio, you can begin to develop a clearer picture of your financial situation.  This is certain to help you better determine the best course of action for your situation.  One thing to keep in mind is that your ratio will change as your expenses and income change, so calculating your ratio often is a good idea.