In one of my first posts, I explained how to calculate your savings rate. Today I want to introduce a new term: Cash flow.

It’s not going to be a long post but I will need you focused for this one.

What is cash flow?

I think cash flow is one of the simplest concepts to understand. It is literally how much cash you received minus how much cash you spent.

If you receive more cash than you spend, that’s a positive net cash flow (or net cash inflow). If you spend more cash than you receive, that’s a negative net cash flow (or net cash outflow).

Example 1

Let’s assume Lazy FI Person received a net salary of £2,000. Let’s also assume he paid £1,000 on expenses (groceries, bills, rent etc.) and transferred £800 to his SIPP. What is his net cash flow?

Cash received (cash inflow): £2,000
Cash used (cash outflow): £1,800

Net cash flow: £2,000-£1,800=£200 positive net cash flow

“But £800 to SIPP is saving!”

That’s right but it doesn’t matter, when we look at net cash flow we only look at cash inflows and cash outflows.

Cash flow GBP
When looking at net cash flow, we only care about cash

Winning on the savings rate front but losing on the cash flow front

Now let’s take another scenario and add some more details to complicate stuff a little further.

Example 2

We’re gonna borrow Lazy FI person one more time to be my lovely assistant.

Lazy FI Person’s monthly income

Lazy FI person earns a net salary (after pension and taxes) of £2,000
His employer’s pension contributions are £100
His employee’s pension contributions are £600.

Lazy FI Person’s monthly expenses

Groceries and bills: £800
Mortgage: £1,000 (£300 interest and £700 principal)
Childcare: £667 (he contributes £2,000 each quarter to his tax-free childcare account to maximise the government bonus)
Other expenses: £100

Can you calculate his total savings rate and net cash flow? If you’re new to this, I would suggest pausing here and trying to calculate it yourself before you keep reading.

If you can’t be asked, Lazy FI Dad’s here for you.

Savings rate:

His income is £2,700 as we include both the employee’s and the employer’s contributions.

His expenses are: £800 + £300 (only the interest is an expense, the principal is savings) + £667 + £100 = £1,867

That means his savings are £2,700- £1,867 = £833.

His savings rate is, therefore, 833/2700= 30.85%, a round of applause for Lazy FI person.

before you start clapping, let’s ask ourselves: Is this sustainable? Let’s look at the cash flow.

Lazy FI Person’s Cash flow:

Cash received (cash inflow): £2,000 (the pension is not liquid and is not treated as cash)
Cash used (cash outflow): £800 + £1,000 (all the mortgage is paid out so it’s all cash outflow) +£667 +£100 = £2,567.

Net cash flow: £2,000-£2,567= -£567, that’s negative £567.

This means that every month that passes, Lazy FI person’s cash (or bank account balance) shrinks by £567.

Despite the negative net cash flow, it is important to remember that a positive savings rate means his net worth will increase month over month. However, it is increasing in illiquid accounts.

“How long can he last this way?”

Depends on how much cash he has. You need to divide the amount of cash he has by the net negative cash flow. For example, if he has £1,000 in his current account, he will not be able to last 2 months before he goes into overdraft. That’s because £1,000/£567 = 1.76, which is less than 2 months.

This example demonstrates why it’s important to look at cash flow. It also demonstrates that you can have a really impressive savings rate but still be cash flow negative.

Our own situation

Why am I telling you this? Why do I suddenly care about cash flow?

Well, if you’ve read all the way to here, you deserve to know our big news: Lazy FI Mum is pregnant!

We’re expecting a new child to join the Lazy FI family next year.

Special delivery for the Lazy FI family

As part of the preparations for the new baby, I built a budget on Excel (of course I did).

Why did we build a budget?

Besides the fact that we wanted to be prepared, we have a few unique (for us) circumstances. We wanted to see how those circumstances will affect our financial position and to see if we have enough cash:

First, Lazy FI Mum will take maternity leave. This not only means that our income will decrease for a few months, but it also means we will not be able to contribute to our tax-free childcare account in that period. This point was raised by Donna (thanks Donna!) in the comment section of the post about tax-free childcare.

Besides that, once she will finish her maternity leave, we will start contributing £4,000 each quarter to tax-free childcare accounts. That’s £2,000 per quarter per child. If the government is willing to pay part of my kids’ childcare- I’ll take it!

In addition, I am expecting a nice bonus next year. However, it will not affect our net cash flow because I still want to get the full child benefit. That means the bonus will go straight to my pension. You can read about my reasons in my post about increasing your child benefit with pension contributions.

Regarding pensions, the government will raise NI (National insurance) rates by 1.25% from next year (see for yourself). That means pension contributions are even more attractive than before. You don’t pay any taxes on your contribution initially (so you save the NI) and even when you withdraw money, you only pay income tax, but no NI. I don’t include any taxes on my pensions in my financial models and you can read about my reasons here.

If that’s not enough, we’re also planning to buy the rest of our shared ownership flat in the next few months.

Our conclusions

After building the budget, we noticed that we will still achieve a really good savings rate. However, we will be cash-flow negative at some point in 2022.

I’m really happy we looked into that because now we know that all we have to do is pile up cash. Sounds easy. What this means for us is that we’re going to decrease our ISA or LISA contributions for a while.


The FI community is big on the savings rate. Cash flow, however, is an aspect that is not mentioned enough in my opinion.

While savings rate is super important and will determine how long you have until you reach FI, if you are cash flow negative and don’t have enough cash, you won’t get there. You will, sadly, end up having to go into overdraft or sell some of those investments.

Anyway, that’s it for today, remember to look at your cash flow as well as your savings rate.