Cashflow planning: what is it and how it helps you build wealth
Understanding cash flow and how it changes through your life is the foundation of your financial plan. It is the first step we take in crafting a financial plan for our clients. It helps you understand your finances clearly and helps you make key decisions that impact your net worth.
Watch video below to see a sample cashflow plan
What is cash flow?
As the name suggests, it is the inflow and outflow of cash from your accounts. Just as a business needs to understand its income and expenses in order to assess its financial health, a person needs to know their cash flows in order to assess their own financial health. Now, when it comes to assessing your financial health, there are three important details your cash flow will tell you:
- Will you have enough to cover your normal living expenses, such as housing, health care, etc, from now until the end of your life, which is projected to be 90 years for most individuals
- Will you have enough money to cover the financial goals and milestones, such as sending your kids to college, or buying a new investment property, or seeking a pay cut or retiring at some point. If you’re a business owner, this could be selling your business, or starting a new business. And if not, the cash flow helps us understand how much we need to save and invest today in order to achieve those goals or if we need to modify those goals
- It helps us make key decisions such as should you take that new loan or should you sell your business at a certain price that you are offered? You’ll be able to see the impact of those choices in your cash flow and in relation to your other financial goals. And that will give you the clarity you need to make the right decision.
For a cash flow to be accurate, it must have these three features
- It must take our whole life into account, from now until the end. Life expectancy is now projected to be up to 90 years for most individuals. It’s not enough just to have assets. We must also have the liquidity to be able to spend
- The second feature your cash flow plan has to have is that it needs to be comprehensive meaning it has to take into account all the income and expenses. That is, not just living expenses, but also taxes and healthcare expenses. In our experience, people always underestimate their expenses
- It must take inflation into account. College is going to cost a lot more 18 years down the road than it does today. So we need to make sure we’re saving and investing enough to be able to pay for the big expenses in the future
If you would like to speak with us about your cashflows and/or any financial planning goals, please book an introductory call below:
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