Do You Know How to Calculate Your Inflow to Outflow Ratio?



Posted: Tuesday, September 29, 2009

by Vincent Polisi
Finance the Dream

Calculating your cash flow is quite easy. You simply take your regular monthly income and subtract your regular monthly expenses. With this same information, you can calculate your inflow to outflow ratio. This is a more complicated financial metric that you can use to get a clearer idea of your financial situation.

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 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 Good job! You are officially making more each month than you spend! Your goal now is to push your ratio as high as you can because the higher your ratio, the better position you are in. For example, if your ratio is 2.0, you are bringing in enough money each month to pay your expenses for two months. Obviously this is a great position to be in. Once your ratio is over 2.0, you need to begin considering ways you can use this extra income to build wealth.

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.

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 how to repair credit report and take control of your financial future.

This Article has been viewed 1,106 times. (Not updated in real-time.)
No comments yet.
We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.