Cash Flow


Another way to explain what you're doing when you create a budget is managing your cash flow.

Cash flow describes the way money moves in and out of your checking account. The income flows in and your spending flows out to cover your expenses.

When there is more going out every month than there is coming in, there's a problem. If it happens only occasionally, perhaps because you had a major expense, you'll probably be okay.

You can get back on track the next month, pay off the extra you spent on your credit cards, and start putting the money back in your emergency fund.

But you can figure out what happens if you spend more every month than you can afford. You'll quickly find yourself in serious debt. The only way to avoid that is to make a budget and stick to it.
 
An emergency fund is just what it sounds like: a minimum of three to six months of living expenses in a savings account that you use ONLY in a real emergency.