“Wait, that can’t be right. Is this saying that I’m underwater?” It was at that very moment that my dear friend realized just how dire his financial situation was. To the cent in fact. Over the past 11 months, on average, he was spending more than he took in. The crazy part is that he was under the impression that he was in great financial shape.

After validating the numbers on the spreadsheet, I let my friend know that I’ve been there myself, and that knowing where he stood was the first step in turning things around. It reminded me of my first Alcoholics Anonymous meeting, where I learned that step one of twelve on the road to sobriety is admitting you have a problem.

It’s easy to think you’re in better financial shape than you are.

A key reason for this boils down to life being messy, and spending reflecting life. Before learning how to properly budget, I can’t tell you how many times real life scoffed at a perfect spending plan I had dedicated hours to creating.

I’d find myself needing to pay for a car repair, I’d cave and buy an unnecessary gadget that I just had to have, and then there was my specialty, drunkenly spending a small fortune buying rounds of drinks for all the “friends” I made on the journey from one bar to the next.

To compound matters, all that spending was done on credit cards, which felt like a smart and wise move, since you know, I was building points. Even when you never miss a payment though, credit cards and other forms of debt-based spending put time and distance between buying something and actually paying for it. It’s just simply easy to lose sight of how much you spend when the money leaves your account 60 days later. Buy now, pay later programs offered through companies like Affirm and Klarna only further numb you from reality.

Your most important financial vital sign

Just as your cholesterol neatly encapsulates your risk for a heart attack, your Monthly Cash Flow assesses your risk for eventually going broke.

Monthly Cash Flow (MCF) is the difference between all the money that comes in, and all the money that goes out, averaged over the last twelve months. If you’d like a step by step procedure to calculate this for yourself, check out my post on calculating your runway.

Taking the 12-month average ensures that your MCF is “fully loaded.” That spur of the moment weekend getaway you took with your loved ones last summer? Yeah that’s in there, along with all the eating out that followed since you didn’t cook the week after. Remember how last year you went a little crazy with the holiday gifts? So does your MCF.

What you make is important, but what you keep is all that matters. 

MCF is the great equalizer. People with high incomes often have high expenses, and can very easily have a lower MCF than someone with a modest income who keeps most of what they make.

If your MCF is negative, it’s a matter of when, not if, you’ll eventually go broke. On the other end, the larger your MCF, the more you keep, and stronger you are financially. I’m a firm believer in playing for keeps.

Having a large MCF opens up an entire world of wonderful options like creating an emergency fund, accruing for large purchases like vacations and vehicles, putting away extra for retirement, paying off debt ahead of schedule, and investing in a kid’s college fund. True wealth is measured in options, not account balances.

Guide your decisions with MCF

My friend’s jaw dropped when he unexpectedly learned that his MCF was negative. The funny thing is, the reason we got together on this fateful day was to figure out his income needs for an upcoming salary negotiation. He was trying to figure out how much more he’d need to make for a move to LA or NYC to make sense.

Once we calculated his MCF however, it became clear that staying put, lowering his expenses, and finding a higher paying job in town (or remote), would be hands down his best option. That’s the beauty of MCF, it cuts through all the noise and provides you with an objective, crystal clear measure of exactly where you stand. Don’t get caught up on how much you make, focus instead on playing for keeps.