In last week’s column, I wrote about why it’s a good idea to draw up a spreadsheet of what you own and what you owe and how to do it. To recap, it’s a great way to evaluate your current finances and an important first step toward making those positive spending tweaks that make such an enormous difference over time.
Once you know where you are financially and have some goals in mind, the next step is to go through your income and spending to see if they align with those goals. Financial planners write up what they call cash flow projections, which is a family-sized version of what a company might call an income statement or cash flow statement.
A statement of financial position (really a net worth statement) captures your situation at a given point in time. A cash flow statement is similar to a budget, but is usually a bit more detailed. Here’s what goes into a cash flow statement or projection:
Inflows
I don’t know why it’s not called income, but inflows are what you’re bringing in. Some examples of inflows might include salary, dividends, interest, business income, rental receipts, retirement account distributions, Social Security, trust income, and any other source of cash that comes your way. It’s a good idea to list these pre-tax, because taxes get their own special section, which makes them easier to despise–err, make that “analyze separately.”
Something to think about: as you approach retirement, you’ll want to consider whether you’ll have enough passive inflows to maintain the lifestyle you desire. You can also, of course, spend down assets.
Outflows
Again, the bigwigs could have just called these “expenses,” but now you know the formal term for what makes your pockets or purse feel thinner. Planners divvy up outflows into two broad categories: fixed and variable.
Fixed outflows are predictable and difficult to change. Car payments, mortgage payments, rental property maintenance, and minimum credit card payments usually fall into the fixed category. Insurance costs might also be included here, or, if they are complicated, maybe broken into a separate category of its own.
Variable outflows are those expenses that are either difficult to predict, you have some control over, or both. Food, entertainment, some utilities, clothing, vacations, “mad money,” gym memberships, and out of pocket medical expenses would go here. It’s a good idea to break out savings and investment from other variable outflows, because that will help you figure out what portion of your inflows go toward building your liquid net worth.
Taxes can be broken down into employment taxes, business taxes, property taxes, federal taxes, and state taxes.
Your inflows minus your outflows is your net cash flow. Hopefully it’s positive or soon will be. But that’s only a start. You can also check out your financial flexibility by comparing your fixed outflows to the variable ones, figure what percentage of your income goes to taxes, and, especially your savings rate. If you’re not comfortable doing that, a professional financial planner can certainly help.
A cash flow statement contributes to changes in net worth, but it’s not a perfect link. There are some gains and losses that won’t appear on your cash flow statement that might show up in your next statement of financial position because they don’t involve bringing in or spending cash. When your investments go up or down, your home changes in value, or your car depreciates, that won’t show up in your cash flow but will in your net worth.
Putting together these financial statements might seem daunting, but it’s as necessary to building wealth as getting a regular checkup is to your health. Though it’s tempting to wing it, if you do, you may be missing some easy ways to build a more secure future.
Source: all of this is core financial planning knowledge and definitions.
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries. These opinions are based on Evan R. Guido observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 11/26/2024 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. You cannot invest directly in an index. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. CDs are FDIC insured and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value. Other investments are not insured, and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested. Neither diversification nor asset allocation assure or guarantee better performance and cannot eliminate the risk of investment losses. This information is intended to be educational and does not reflect any particular investment or investment needs of any specific investor.