Do You Know How to Calculate Your Inflow to Outflow Ratio?
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Home Page > Finance > Personal Finance > Do You Know How to Calculate Your Inflow to Outflow Ratio?
Do You Know How to Calculate Your Inflow to Outflow Ratio?
Posted: Sep 28, 2009 |Comments: 0
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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 Below- A ratio at this level means you are living well beyond your means and already experiencing or headed for serious financial trouble. You have a cash shortfall ever month, and are forced to result to borrowing to make ends meet. If you are in this situation, you need to start making major lifestyle adjustments NOW! If you do not, you will inevitably end up experiencing a financial disaster. You may already be in a desperate situation, but if not, you are headed there quickly!
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 Congratulations! You are making more than you are spending. The higher your ratio is the better off you are! If your ratio is 3.0, this means that you are bringing in enough money on a monthly basis to cover your expenses for two months. People with a ratio over 2.0 should consider their investment strategies so that they can maximize their surplus income as a basis for wealth building.
Determining your inflow to outflow ratio can be a valuable tool to help individuals determine what course of action is most appropriate for their circumstances. Bear in mind that your ratio changes as your income or expenses increase and decrease; therefore it is important to recalculate the ratio frequently. For example, if you are at a ratio of 1.0 and then decide to add on a new boat payment, you may find your ratio significantly reduced. Likewise, if you suddenly get a big promotion at work you may find yourself frittering away surpluses that should probably be invested.
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Vincent Polisi is the founder of Credit Repair College. Credit Repair College empowers people to learn do it yourself credit repair by educating them on all aspects of credit repair. Please visit them on the web to learn more about buying a house with bad credit, credit repair and taking control of your financial future.
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