Cash Flow planning and budgeting are important components in your financial planning at all stages of your life. Managing your cash flow and how that money is spent is critical regardless of your net worth.
Many of us think of the term cash flow in terms of running a business. Your own personal finances are not that much different than running a business. Cash flow is the fuel that feeds your financial planning efforts. Cash flow provides the money that you invest in both taxable and retirement accounts.
On a more basic level, free cash flow provides the money our clients need to support their lifestyle at all stages of their lives. This includes their working years as well as their retirement years.
Cash flow represents the cash and the various assets that you receive and that you pay out. Typical forms of cash inflows might include your compensation from working, Social Security or a pension in retirement, withdrawals from retirement or taxable investment accounts or income from investments.
Cash outflows include various living expenses such as rent or a mortgage payment, a large purchase such as a car or the down payment on a home, food, prescription medication, taxes and just about anything else that you spend money on.
Someone with a high level of income may not have a solid level of free or net cash flow to invest. There can be issues with overspending, taxes or other issues that depletes a high percentage of their income before it reaches their bottom line.
This is where budgeting comes into play.
Just like a business, individuals need a budget that tracks their cash inflows and outflows on a regular basis. This includes regular cash flow items that recur on a monthly basis. It can also include cash inflows or outflows that occur less frequently or sporadically. These types of inflows might include dividend payments from stocks, an annual bonus from work or even an inheritance from a relative.
On the outflow side these non-standard items might include payments for various types of taxes, some insurance policies, tuition payments or a one-time outlay for a large purchase.
Our work with clients includes helping them develop and maintain a cash flow budget. Part of this process is establishing and maintaining an emergency fund for unexpected outlays that can occur.
A budget is crucial during all phases of your life, but perhaps even more crucial in retirement. Helping our clients establish a spending budget for retirement, and matching that spending to their projected sources of cash flow in retirement is a crucial step in the pre-retirement planning we do with our clients. Monitoring and adjusting this budget in retirement is a key aspect of the planning we do with clients once they are retired.
Budgeting and cashflow go hand-in-hand. A budget helps you look out over a timeframe such as a year or more to visualize what you project will be coming in and going out in terms of your cash flow.
A budget is not static, things can and will change. We work with our clients on an ongoing basis to help ensure that their budget reflects the latest information they have regarding their upcoming cashflow.
This is part of the ongoing financial planning process with all clients. Focusing on our client’s cash flow and their budget helps ensure that the portion of their cash flow that relates to adding to their investment and retirement accounts is solid. This also dovetails in some fashion with all other aspects of their financial planning efforts.