Don’t confuse Cash Flow with a budget as so many do, they are not interchangeable. A budget is used to track expenses. Its sole purpose is a method of forcing one to live within their means to save money. It implies a mindset of scarcity. In contrast, Cash Flow provides a full view of one’s financial picture and includes every source of income and every instance of expense throughout all three 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.
Why It’s Important
Cash Flow shows your current position relative to your goals and may even provide a forecast of your wealth. Cash flow analysis is much like your car’s GPS. It provides a starting point, a destination, and every reasonable route. You select the route of choice and the journey begins.
Assets, debts, income, and expenditures, are 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 lead to the desired destination.