Analyzing Cash Flow is Crucial to Your Planning
Have you seen your cash flow lately? Analyzing your current cash flow – that is, taking a good look at how your expenses stack up against your income – may not seem like a high priority, especially if you feel relatively financially comfortable. However, doing periodic “check-ups” of your cash flow is an essential part of your financial planning, because to plan for tomorrow, you need to take charge of your cash flow today.
To get a clearer sense of the importance of a cash-flow analysis, consider life insurance planning. Determining your life insurance need requires you to look at your family’s current assets, income and expenses and project these amounts into the future. You can quantify your assets by assessing your net worth (as we discussed in the February edition of Financial Insights), but to get a good handle on your income and expenses, you need to do a cash-flow analysis.
And then there’s retirement planning. A cash-flow analysis will benefit you here, too. To plan successfully for retirement, you have to think about issues like the age at which you want to retire, your likely life expectancy, the kind of lifestyle you hope to lead in your “best years,” whether you think you’ll work at least part-time, etc. These issues center on the standard of living that you plan to achieve in retirement – and that standard of living will depend in no small measure on your cash flow today. By calculating your current expenses in various categories and then comparing your total expenses to your total income, you can more accurately gauge the achievability of your retirement goals. In other words, based on your cash flow today, will you be able to save and invest enough money to get all you want out of retirement? And are there any current expenses you could do without in order to salt away more of your income for retirement? A cash-flow analysis can provide answers to these and other important questions related to your retirement planning.
There are more good reasons why keeping tabs on your cash flow is crucial to successful financial planning. For example, maybe you wish to minimize taxes on your estate, put your child through college, or buy a vacation home. Each of these goals will be more achievable if you stay in watchful command of your cash flow.
To do a cash-flow analysis, calculate your expenses and income for three to six months. You can either review records for the past three to six months or track figures for the next three to six months. You can lay out all the numbers on this online calculator at www.kiplinger.com/tools/budget/ if you like. Or, give us a call at Grand Wealth Management, and we’ll be happy to send you our worksheet.