I know that I’m a financial planner, but even if I wasn’t I would probably still have a very detailed and thorough cash flow plan. Living without one, for me, is like driving cross country without GPS. We weave cash flow planning into our comprehensive planning process for good reason.
During a recent annual cash flow review, we were encouraged to see that the client could save $12,000 next year. This is great information, right? We now identified the savings goal for the year. If $12,000 was saved and invested, the plan was on a good track to reaching future goals.
But the client also had seasonal credit card debt and a few months when rent was difficult to make on time.
In creating this cash flow plan we tried to account for everything – all income and all expenses. The reason we approach cash flow planning this way is to primarily retain the lifestyle goal. When there is an annual surplus or deficit we can plan accordingly to save, invest, or cut back.
This plan included an annual bonus and holiday cash gift from his parents. Sound familiar? While overall the plan looks extremely positive, the time between bonus and gift time was rather stressful.
Award pay, gifts, stock options, and inheritances are all good examples of what I call “lumpy” income. They come at certain or unexpected times of the year. An annual cash flow plan is not enough to support this client’s goal – achieve positive cash flow throughout the year.
So, we did a few of things:
- Looked his paycheck cycle and starting budgeting per paycheck.
- Noted closing and due dates for his credit cards.
- Teased out months when spending trended much higher or much lower than the average.
By narrowing the focus and analyzing cash flow on a bi-weekly schedule, expenses were more aligned with paychecks. Credit card payments are on time and lining up when the money is available. When vacations or holiday come into play, we budget for them. For example, set aside 20% of the bonus for next year’s trip and another 10% for gifts. When those things come around, the money is already teased out.
In everyday practice, this takes work. I won’t sugarcoat change. But if you want to get on the path of positive cash flow week to week, month to month, and year to year, cash flow planning is a great way to start.