Managing Cashflow

Do You Have Visibility Over Your Cash Flow?

Regardless of your life stage or income level, creating a personal cash flow statement can be a valuable exercise. In a basic sense, it is a snapshot of your sources of income, as well as what you’re spending and saving.

Do you know how much you spent last year, or how much was spent on each type of expenditure? Although many of us have good visibility over our income, we may not have a clear picture of where funds are going.

Regardless of your life stage or income level, creating a personal cash flow statement can be a valuable exercise. In a basic sense, it is a snapshot of your sources of income, as well as what you’re spending and saving.

Do you know how much you spent last year, or how much was spent on each type of expenditure? Although many of us have good visibility over our income, we may not have a clear picture of where funds are going.

Creating a Personal Cash Flow Statement

As a starting point, creating a visual map of your expenses can be an eye-opening experience. Use credit card bills, banking statements and other records to create a snapshot of your expenses last year, including everything from clothing to income taxes, by categorizing them into essential and non-essential expenses.

How Much Do You Spend in Each Category?

Essentials

    • Housing — rent, property tax, mortgage payments
    • Transportation — car payments, insurance, gas, public transit, parking, maintenance
    • Food — grocery, work lunches
    • Utilities — water, electricity, gas, cable, internet, phone
    • Insurance
    • Medical expenses
    • Taxes
    • Other — one-time home maintenance, etc.

Non-essentials

    • Lifestyle — subscriptions, memberships, clothing
    • Recreation & Entertainment — sports, travel, hobbies, eating out
    • Other

You may discover that your expenses aren’t exactly what you thought. Understanding where your funds are going can help you plan and think proactively about how to use future funds and balance different spending priorities. For spouses, it can help provide congruency over spending decisions. This exercise may also play an important part in planning for the future or preparing for retirement. After all, it is difficult to determine how much money may be needed later in life without having an understanding of how much is being spent today.

Valuable for High-Net-Worth Individuals

While high-net-worth individuals often have ample funds to support their spending habits (it is often not a question of affordability!), dissecting your expenses can prompt other questions: What is the right amount to spend on non-essential expenses? How can spending decisions be communicated within the family?

For some families, it helps to form the basis for a discussion about intergenerational wealth preservation. A potential concern may be that subsequent generations will fritter funds away. Having good spending habits can send a positive message to future heirs and teach them about maintaining wealth. It may also generate a conversation about where to designate unallocated funds. For instance, this may include philanthropic or charitable initiatives.

Equally Important for Retirees

Since many retirees are constrained by fixed incomes, a clearer picture of current spending habits can be beneficial. It may help determine whether retirement plans are on track or if adjustments need to be made. For example, small modifications to spending habits may be required, or there may be a need for larger changes such as downsizing a home, or using insurance to help generate cash flow. This may be especially important when planning ahead for unpredictable risks, such as an economic recession or a market downturn.

Two Things in Our Control: Spending and Saving

As investors, we often have little control over the direction of equity markets, company performance, or even economic growth. However, what we do control is the amount we spend and save, which can significantly impact our future wealth.

If you need support, we have a variety of budgeting and cash flow tools available — please get in touch.

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