Everything You Need to Know About Cash Flow

Welcome to the Common Sense Financial Podcast, a podcast all about finances, mindset and personal growth. The goal? Helping you make smart choices with your money in your home and in your business. And now your host, Brian Scribonia. Hello everybody and welcome to episode number four of the Common Sense Financial Podcast. My name is Brian Scribonia. I've been in the financial services business since 1993 and I've had actual face to face conversations with thousands of business owners, families and individuals helping them develop solutions for real life situations. And it's my goal with this podcast to bring these real life experiences to our audience and offer a way to think about these topics and how they apply to your situation. Today, we're going to discuss how money flows in and out of our life and why understanding your cash flow is the single most important part of your financial planning. We live in a world where there are more and more external things that keep much of our financial life out of our control. For instance, the stock market, government regulations, tax policy, interest rates, inflations, terrorism, rising health care expenses, all these things leave us in a continuous state of fluctuation. And this perpetual state of fluctuation often leaves us confused and searching for a way to establish more control over our money. One area of our financial life where you do have control is how you spend and save the income you receive. So how you save and spend your money as it flows in and out of your life is called cash flow. And cash flow is the lifeblood of your financial life. It's what enables you to fulfill responsibilities and luxuries now and for the rest of your life, which we're going to talk more about here. So your cash flow may be funded by employment or a business, or it can be income generated from your assets. Regardless of its source. You have cash flowing through your hands, and it's either flowing out of your control or it's flowing into your control. So your cash flow really breaks down into three primary areas. When you think about it. You have your reoccurring obligations. These are those things that happen pretty consistently every month, every month throughout a year. So these are things you can typically rattle off in your sleep. Irregular obligations are things that happen more sporadically throughout the year. Such things as personal property tax or perhaps like auto insurance. That's once a quarter. These are just a couple of examples. So when take your reoccurring obligations, your irregular obligations, and net that out with your income, that leaves a difference. And that's typically what we store. We store that money for a later purpose and so we're going to talk about these three things here, more in a second. But a few realities to cash flow planning that are often overlooked with basic budgeting is the purchase of automobiles, home improvements and other big ticket items. When we think in terms of that storage that we just referenced a second ago, a lot of times people will put that money in a bank. But what I find is that a good saver while they save money, there is typically a disconnect between what's being saved and the looming big ticket purchases that are coming. And so the savings amount is usually not enough to make the purchase within the time frame they are needing to make the purchase. So the good intention is there, but the details of the planning are often missed. There is also a disconnect between how bank payments are being handled compared to what big ticket purchases are coming. People often want to focus on paying down debt without thinking about how to get out of a cycle of financing those big ticket purchases. So cash flow planning brings all of this together by anticipating your big ticket purchases, avoiding debt, and arranging your budget to align with your cash flow needs. Instead of compartmentalizing these things, it all becomes part of the same conversation. I met with a client recently who had about $100,000 worth of big ticket items that they were wanting to purchase over a four year period and they currently had about 30,000 saved and they're saving about $400 a month. So when you start thinking through those numbers for a minute, you know, $400 a month over a four year period, and if you take the 30,000 they already have saved, that puts them at about 50,000. So that leaves them about $50,000 short of what their anticipated goal is. So what I had, what we were doing as we were looking through their situation is we're trying to find the money that was flowing out of their control. Because this again is an example of where, you know, they had these goals, these big ticket item goals, and they were saving some money each month, but the amount of money that they were saving wasn't in line with their actual needs. It wasn't reality. So what we did was we identified one obvious glaring area of their financial picture was that they had a home loan of about 27,000, that they were paying 500amonth. And they had another note that they had about 48,000 on that they were paying 1,000amonth. So here you have somebody who has a $75,000 balance on a couple of loans and they're paying $1,500 a month. So what we did was we looked at refinancing the house for the 75,000, which made a new payment of about $358 a month. So what that did was that freed up $1,142 a month. If you take that $1,142 a month and you take that over that four year period, that's an additional 54,000. So when you take the 50,000 that they we're already on track to save, and then add this 50,000 to the mix, now they've reached their target of the $100,000. So what we did is we aligned their cash flow with what is reality. You know, they have their regular obligations that were being met, they had their irregular obligations that were being met. But then we also planned out and mapped out the next four years of expenses that they were going to have to spend in chunks, those big ticket items. And now their cash flow is adequate to satisfy, not monthly budget, which is where a lot of people live. But we actually mapped out four years of expenditures for them. So when it comes to storing money, you need to answer some questions. How will you actually use the money you're storing? In other words, what is its purpose and when exactly will you need it? So when you consider such things as automobiles, home improvements, college tuition, retirement, this is all part of your future cash flow. And you need to be able to answer questions like this to establish control of your money. Why are you saving money? How will you use the money? What is its purpose? When will you need it? Think of this as planned chronological spending and saving. Again, like I mentioned a minute ago, many people think in terms of weeks or months. But really, to be effective in maintaining control of your cash flow, it's recommended to think in terms of years. It's a goal with each client that we have to map out three to five years of cash flow so we can help fund it. So what I'm going to do to help you out a little bit is put up a link in the show notes to our cash flow worksheets. And you can follow that link and download the worksheets and begin working through this for yourself, because this is real important. Having a working knowledge of your cash flow helps you establish flexibility, access and control of your money, which can all allow for more money to be retained and utilized during your lifetime and for future generations. See, there's a much bigger picture here than just paying bills each month. We're not talking about just trying to get by. We're talking about developing a strategy to Build true wealth over time. And the sooner you identify what money is flowing out of your control, the sooner you can make adjustments in your cash flow to have more money flowing back into your control. So some of the other things that may challenge your thinking when it comes to all this. For instance, when you think about your cash flow, are you thinking about the percentage of your income that is flowing to the government? Do you really know what amount that is? What I find with many people is that they write out what their monthly expenses are based on their net income. So the net income basically is the amount of money that's deposited into the checking account after all the deductions. That's where most people live when they're doing their budget, is that net income. And they often don't know what they're paying in taxes until I walk through that tax return with them. The problem with this approach is that the amount of money flowing to the government is money flowing out of your control. And, and can often account for 20, 30% or more of your income. And add in what I described a minute ago with the client who refinanced. Payments to banks can range from person to person, obviously, but they can easily reach 30, 40% of income. When you consider mortgages, auto payments, student loans, credit cards, this puts a big strain on cash flow and is money flowing out of your control. So when you combine what you send to the government and to banks together, you can easily see where 50, 60, 70% of your income is flowing away from you and out of your control. Another thing to add into this, if you think about it, is putting money into government sponsored retirement programs. You can add another 5 or 10% to this percentage, which is more money flowing out of your control, because you cannot access that money until you're 59 and a half without borrowing the money out. And that's a whole other story. But it is money that's flowing out of your control and it's not available for these bigger ticket items. So when you think about how money is flowing through your life, you see that this leaves about 25% of the money you earn left to your discretion. And that's a lot of money flowing out of your control. So when you think about it, when you spend money, it's gone forever. When you finance a purchase, you forfeit control over that portion of your cash flow to the bank. And when you don't track the amount of money you're sending to the government, you run the risk of missing opportunities that can reduce your tax liability. So the sooner you Identify what money is flowing out of your control. The sooner you can begin to make adjustments in how you manage your cash flow to have more money flowing back into your control. This is why cash flow planning is so important. We want to move as much into your control as possible as quickly as possible. This is simply, again, a process of identifying and mapping out how money should be flowing to meet the goals you have over your entire lifetime. The bottom line, we just want to make sure money's available when you need it for the rest of your life. That's what it's all about, and it's knowing what regular and irregular obligations you have over a 12 month period and then mapping out in chronological order what big ticket items you have planned as far out as you can envision. And all this information sets the foundation for your entire financial picture. Because at the core of all your financial planning decisions is cash flow. When you are planning your retirement, you have to know your cash flow. When you're wanting to buy a new car, send a child to college, make a home improvement, we have to look at your cash flow. When you want to save money or make an investment, we need to look at your cash flow. Nearly everything you do or want to do begins and ends with your cash flow. So to sum it up, everything really is about cash flow. That concludes today's podcast. If you'd like to discuss any of this in more detail, give me a call at 636-296-5225. Again, 636296, 5225. In our next podcast, we will continue on the topic of cash flow and we'll bust some of very common myths about how to use money. There's so much more to cover on this topic, so be looking for this in the next couple of weeks. I'm Brian Scribonia and thank you for listening to the Common Sense Financial Podcast.