The differences between budgeting and cash flow

This tends to be a financial planning topic that trips people up. Sure, budgeting and cash flow are closely related, but they’re actually two separate parts to personal financial planning.

Cash flow:

Cash flow = what you earn – what you spend

With this equation, you can be either cash flow positive or negative.

If you’re cash flow negative, it means you’re spending more money than you have and likely taking on debt. If this is you, you need to ask yourself two important questions: where can you cut back on spending, and how can you increase your income? You should try to do one or both of these things to the point that you’re cash flow positive.

If you’re cash flow positive, you’re able to put your money into savings. “Savings” doesn’t sound motivating, so instead, think of your specific goal. It could be a trip to the beach, paying off your credit card debt, retirement, or a new car. There’s a lot you can do if you are able to put some money to the side each month.

*Check out our Instagram below to see some of the cool things you can do with saving.

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Related: The Savings Hierarchy: How to Effectively Prioritize Your Savings

You can also be cash flow neutral which is essentially living paycheck to paycheck, and it means you’re likely to end up cash flow negative more often. This is obviously not ideal.

Regardless of if you plan it or not, you will always be either cash flow negative, positive or neutral.


Budgeting = directing how much and where you’ll spend or save your money

When you’re setting a budget, you’re essentially creating a road map for your money. You’re deciding that you’ll spend X amount on something each month, and once you hit that spending limit you stop spending in that area.

Not only will you project what you’ll spend on a budget, you’ll also track it which will give you a better understanding of where your money goes every month. A well-maintained budget can give you much more information on your personal finances than simply knowing your monthly cash flow.

There are limitless ways to budget, whether it’s determining exactly where each dollar will go, or budgeting using a broad approach like our TSL method. There are also many online programs and apps which can help you with budgeting, or you can use the tried and true method of Excel ( (Wela advisor Eddie Goepp's favorite).

Related: Economic Shutdown: A Household Financial Cleanse With Eddie & Rebecca Goepp

An important distinction between budgeting and cash flow is that while cash flow happens regardless of your planning, a budget has to be created and tracked. It’s not typically something that just happens.

How they’re connected

Budgeting and cash flow are not mutually exclusive. In fact, people who budget are able better able to keep track of their cash flow. As they say, knowledge is power, so if you have a better understanding of your cash flow you can typically work to improve it, and set and track goals more easily.