If you are a client of TAAG you have probably had a conversation or two over the years about your cash flow. It’s a common topic that we discuss in meetings. Understanding your cash flow is a basic building block of financial planning. It helps you to identify where your money comes from, and where it goes. Organizing this information helps to cut costs, save more, and make important financial decisions. The goal of this blog is to help you determine when it’s time to review your cash flow, how to go about it, and some things to watch out for.
When is the right time?
Depending on your situation, cash flow may remain steady for long periods of time or change on a more frequent basis. Either way it’s a good habit to review on a regular basis that fits with your life. My wife and I like to review our cash flow before, during or after big life events. In August 2019 we welcomed our second child and bought a new home in a six-day window. In hindsight I am convinced we both had a moment of periodic insanity, but that’s another story. While it was certainly a crazy time – one thing that we didn’t worry about was the impact to our monthly cash flow. This is because we had successfully planned for this series of events. We had a good idea of the impact the baby and a move would have on our finances. We had no way of knowing we’d find the right house at nearly the exact same time Elliott was born, but we were able to pull it off in part because of this financial clarity.
Changes to income provide another great opportunity to review your cash flow. As an example, we recently made some updates when I started working at TAAG, and again when Hilary experienced some income changes due to the COVID-19 crisis.
Lastly, large expenses provide another great opportunity to make sure you understand the movement of your money, and the impact of a new outflow. This could be private school or college tuition, a new car payment, buying a boat, or purchasing a second home. Even if you are settled down in a period of minimal change, I recommend you review your cash flow at least annually.
How do I go about it?
It can be a challenge to identify all your financial moving pieces. For cash flow purposes, most of the data you need can be found on your paystubs, checking account and credit card statements. Once you have those things together, the “end product”, so to speak, can take many forms. Some people prefer a very detailed budget with everything accounted for and all expenses categorized. Another method is to back into your general living expenses by starting with the income from your tax returns and removing the biggest, most predictable items – taxes, insurance, and savings. What you’re left with is a pretty accurate amount of spending for a given year. Your situation and the specific financial question you are trying to answer will dictate the required level of detail. The main thing to remember is that your cash flow plan is unique to you and should be something with which you are comfortable and understand. You can find several budgeting and cash flow templates available online, or just ask us and we’ll be happy to share some of our favorites with you.
Things to watch out for
While you don’t need to track every penny – an effective cash flow plan needs to be fairly accurate. Here are some things to consider as you work through the exercise.
- Don’t forget about taxes – make sure your analysis is consistent throughout on a before or after-tax basis.
- Make sure your timing matches up – monthly and annual cash flows are the most common and useful. Adjust income and expenses to match the time frame of the analysis.
- Review several months of data – Some expenses are paid on a quarterly or semi-annual basis. Other things change month to month. Review several months and take an average if necessary, to make sure you are not missing anything.
- Plan to save – add savings as a line item in your analysis. Whether it’s college, retirement, or investment account contributions – treating saving like an expense will ensure it happens.
- Be conservative – for variable expenses like gas and groceries I always take an average and then round up to leave myself room.
- Plan for the unexpected – a trip to the doctor, car repairs, home maintenance, weddings, or gifts – it seems like something always comes up that you don’t expect or that isn’t regular, come up with a dollar amount and plan for it anyway.
- It’s a team effort – work together with your partner to make sure you’re on the same page. This will also help you understand your priorities – a professional landscaper vs. cleaning service, or summer weekends at the club vs. season tickets to see your favorite team.
A cash flow review is a great tool to reduce financial stress, plan ahead, make sound decisions, save money, and ultimately drive positive financial results. However, it can be a difficult and daunting process, especially if you’re starting from scratch. TAAG is happy to help get you started, answer questions that come up, and keep you on track with your goals. Please feel free to reach out if you think we can help.