Wealth management is complex, we try to simplify life for clients by breaking it into 10 elements. Many of these elements carry sub-elements. Our goal is to focus on one element each month to provide you with a comprehensive overview of each.
Of the 10 Elements, Cash Flow is one of the most important. A well-rounded plan would be impossible to complete without it and accurate accounting of Inflows and Outflows. This is the measurement of every dollar that comes in and every dollar on its way out. Shocked? That’s right.
All dollars go out.
HOOK: You can have the best budget paired with solid estate planning documents and still hit rock bottom in wealth management.
Ex: Think of yourself as a corporation. The chance that a business would be successful without tracking this critical piece would be slim. You have to treat your planning with as much care and precision with a focus on success. One of the most popular questions people ask is “where did all of my money go?”
We want you to have a full understanding of Cash Flow after today, but also want to be sure you understand what may be the most critical detail, What ISN’T Cash Flow?
- Budgeting! Many people get the two of these confused. Though they are often used interchangeably, they aren’t.
- Budget is used to track expenses. Meaning its sole purpose is a method of forcing one to live within their means in order to save money. It implies a mindset of scarcity. Don’t under estimate budgeting. At any level of wealth one must live within their means to not drain funds. While it is also a critical piece to planning, let’s stay focused on Cash Flow today.
The allocation of it all: Dollars going out doesn’t equate to dollars spent. Rather it is an allocation into the appropriate category. Here are some of the basic buckets where cash flow lands once it comes in as income:
- Charitable Donations
- Retirement accounts
- Education costs
Cash Flow provides full view of one’s financial picture. It includes every source of income and every instance of expense. It accurately identifies negative or positive results. Cash flow is linked to financial responsibility. Knowing how you spend versus how you earn provides a way to make better decisions with your money.
Phases and How Cash Flow Might Adjust
Without question, cash flow is key to solid financial planning, throughout your life. Let’s look at it in three distinct phases:
- Accumulation – these are the early years, when income is lowest and debt is likely the highest. Using cash flow modeling, critical decisions can be made.
- Acceleration phase – your hard work is paying off. Income is growing, debt is likely declining, savings should be moving up.
- Distribution phase – this is the most consequential and difficult phase. Careful planning becomes critical – every misstep can result in unnecessary taxes and lost opportunity.
Goals create a meaningful Cash Flow
- Cash flow analysis shows your current position relative to your goals and even provides forecasted wealth. Building a solid plan requires a solid foundation. It begins with cash flow.
- Cash flow analysis is much like your cars GPS. It provides a starting point, a destination, and every reasonable route. You select the route of choice and the journey begins. Cash Flow analysis is like GPS for your financial journey.
- Assets, debts, income, and expenditures, projected year by year, using calculated rates of growth, income growth, inflation, and investment performance…all of this information is used to determine which routes will get you to your destination.