Understanding Cash Flow: Income Minus Expenses

Cash flow is simple: total income minus total expenses. A positive cash flow surplus means you have money left over to save or invest. A negative cash flow deficit means you're spending more than you earn and going into debt. Tracking cash flow is the foundation of all personal finance — you can't improve what you don't measure.

Fixed vs. Variable Expenses

• Fixed expenses: Stay the same each month (rent, insurance, loan payments, childcare). Budget these first — they're non-negotiable.
• Variable expenses: Change month-to-month (groceries, utilities, gas, dining out). These are easier to reduce.
• Pro tip: Aim to reduce variable expenses by 10–15% without cutting essentials. Skip dining out 1–2 times/month and save $200–$400.

Needs vs. Wants: The 50/30/20 Rule

A simple budgeting framework: allocate 50% of after-tax income to needs (housing, food, utilities), 30% to wants (entertainment, dining, subscriptions), and 20% to savings/debt payoff. This is a starting point — adjust based on your life stage. High earners can save 30–40%; lower-income folks might allocate 60% to needs.

Surplus Allocation Strategy

Once you have a positive cash flow, allocate your surplus strategically: (1) Emergency fund to 3–6 months, (2) High-interest debt payoff, (3) Employer RRSP match, (4) FHSA or TFSA, (5) Additional RRSP/TFSA, (6) Non-registered investments. Don't let surplus sit in a chequing account earning 0% interest.