The backbone of personal finance.

When we deliver formal financial plans to clients, we always start with a cash flow analysis. This allows us to gain insight into how money comes in and out of someone’s life. By doing a cash flow analysis, we get an excellent idea of what someone is paying in taxes, what is being saved to their retirement accounts, what their housing expense is, what is being saved outside of their retirement accounts, what any loan payments look like, and what is being spent on their lifestyle each month.

Your cash flows are literally the backbone of your whole financial life. They dictate and influence your entire financial plan. Throughout this piece, I wanted to show you how your cash flows impact different areas of a financial plan.

Everyone knows that budgeting is super important. By following a budget or being aware of what is spent each month, you can get into a rhythm of saving regularly. But that is only the beginning. 

Cash Reserve:

To understand what amount of cash you need to hold, you have to have an understanding of what you spend each month. Generally, people should be holding anywhere from 3 - 12 months’ worth of expenses as their cash reserve. This range is pretty wide and that’s because people earn income in different ways. Some of us work stable W2 jobs with consistent income, others may be business owners with highly seasonal or variable compensation. Generally, if your income is more inconsistent or you have multiple dependents, you want to hold more cash.

By understanding your monthly expenses, you can have an accurate target amount for your cash reserve.

Retirement and saving: 

When we know what amount is being saved regularly, we as advisors are able to project what type of lifestyle you will be able to maintain during retirement. The more you save today, the more you will be able to live on when the income faucet turns off during retirement.

Additionally, while we may not know exactly what you will spend during retirement, we can know what you spend today. This gives us a decent estimate of what it takes for you to feel comfortable each month.

As people grow their income, we encourage them to increase their savings rate. This always has a positive effect on their retirement scenarios.

Life Insurance:

When it comes to life insurance, understanding your earnings and your expenses are huge components. While our firm is fee-only and does not sell any insurance products, we make recommendations as to whether or not insurance is appropriate for someone.

By understanding the extent to which someone’s dependents are reliant on their income, we are able to project the amount of life insurance necessary. There are some additional variables when calculating life insurance such as final expenses or if someone would like their death benefit to be enough to cover all expenses until their children reach the age of majority in addition to funding education in full.

Again, understanding your cash flows is a huge component in insurance planning. The same goes for disability insurance. In some cases, people are not offered a group disability insurance benefit or they are capped at a certain dollar amount each month. Having a good grasp on your cash flows allows you to identify what is needed to close this gap.

It is fairly obvious that your cash flows heavily dictate your personal finances but so many people do not take the time to learn how money comes in and out of their lives. Some people want more direction in their financial lives, and that starts with cash flows. Fully grasping the way money revolves in your life will serve you well. If you’re going to start anywhere, cash flow is your spot.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!