There is an old saying that “cash is king” but maybe that should be changed to “cash flow is king.” Understanding and managing cash flow are among the most important factors in achieving your financial goals.

  • So often we find that people simply don’t have a handle on their own cash flow. To illustrate this gap, we have developed a simple exercise that many clients find useful.  We often find clients chuckling at the end of this exercise – it at least “gets them thinking:”
  • First, we ask clients – “What is your estimated monthly take-home pay?” Take-home pay would be your net pay each month (after taxes, 401k, etc.). In other words, it’s the monthly payroll deposit that you receive to your checking account.
  • Next, we will move the conversation away from cash flow and talk about other things for 15 minutes. As you read this blog post, consider taking a 15-minute break and do the following:
  • Make a list of your assets (things you own) &  liabilities (debts you owe)
  • Make a list of your top 3 financial priorities
  • Ok, welcome back from your 15-minute break. Our next question is – about how much do you think you spend each month?

By way of example, let’s look at a sample client discussion:

  • Advisor: What is your estimated monthly take-home pay?
  • Client: $15,000 per month
  • Advisor: Great.
  • …….15 Minute discussion of assets, liabilities and goals……..
  • Advisor: Forgot to ask earlier – what would estimate as your monthly spending?
  • Client: We spend about $10,000 per month.
  • Advisor: Can you tell me – did you save $60,000 last year?
  • Client: Wait, what?
  • Advisor: Earlier, you noted that your take home pay is $15,000 per month and then that you spend about $10,000 per month. So, that means you should be saving about $5,000 per month – $60,000 per year.

Of course, the 15-minute gap is intended to put some space between the questions of take-home pay and spending (making it tougher to see the obvious!). Clients often smile at this juncture in the conversation – often realizing that they didn’t, in fact, save the implied amount.

This exercise is intended to be done in good natured manner. The goal is not to criticize a client’s spending habits; rather, we are simply trying to “get them thinking” about how much they are actually spending.

As we move through this three part series, “Cash (flow) is King”, we will dive a little deeper and address a few of issues that commonly arise as we begin to address cash flows

  • When clients recognize the gap between “what I intended to spend” vs. “what I actually spent,” a common reaction is “yes, but last year was a ‘weird’ year.” A weird year….aren’t they all?  We’ll address this in our next post.
  • In the third part of this series, we will address two key questions:
    • How much can I afford to spend each year (and still accomplish my goals)?
    • How can I best track my spending? (Uh-oh – this sounds like “budgeting” – maybe we can find a way to reprogram that word….)

Stay tuned!