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Cash flow planning is the foundation of all Financial Planning, because it allows you to:
- Assess your ability to meet your goals.
- Project your future cash flow needs.
- Identify opportunities to increase income and/or decrease expenditures.
- Make portfolio adjustments to meet your investment objectives with less risk.
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| Here are some important steps to help you think about cash flow planning. You may want to contact a professional to help you develop a cash flow management plan that will give you confidence in reaching your goals.
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Getting started!
1. Do an income and expense check-up.
2. Determine your future income needs.
3. Look at ways to put your "excess" cash flow to work for you.
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| For more help with Cash Flow Planning, contact the Private Client Group |
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1. Do an income and expense check-up.
Managing your cash flow starts with examining your sources and uses of cash.
Step One: Identify and evaluate each source of cash. Recent tax returns can help you make this determination. Sources of cash may include:
- Salary and bonuses
- Dividends and interest from investments
- Alimony
- Closely-held business interests
- Social Security or pension income
- Rents
- Annuity payments
- Notes receivable
Step Two: Identify and evaluate your current uses of cash, including:
- Payments on debts (including mortgage, credit cards, etc.)
- Utilities and taxes (real and personal property)
- Life insurance premiums, especially if you purchase life insurance to cover estate tax liability (outside of employer coverage)
- Regular purchases of significant size (perhaps you like to buy a new car every 3 or 4 years)
- Food, clothing and personal items
- Travel and entertainment
- Gifts (for example, annual gifts to children, charity or others)
- Remember to factor in payments that aren't necessarily monthly. For example, real estate taxes and homeowner insurance premiums are often part of your monthly house payments, but may be set up as quarterly or semiannual payments.
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| Now you have a good idea of where your cash comes from and where it goes. This is the first step toward effective cash flow planning. |
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| For more help with Cash Flow Planning, contact contact the Private Client Group |
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2. Determine your future income needs.
Having identified current income and expenses, now take a few moments to think about additional expenses you expect to incur in the future. These may include:
- Upcoming major purchases (such as a child's college education or a wedding)
- Purchasing vacation or retirement property
- Starting a business
- Increased philanthropy
- Helping a child to buy his or her first home
- Premiums for health and/or long-term care insurance
- Taxes - Particularly if you are planning a move to another state, check into the tax structure and determine how this might affect your cash flow.
By identifying the lifestyle and family decisions you expect to make in the future, you can then determine what your future cash flow must be in order to realize these goals.
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Cash Flow Questions to Ask Yourself
- Do you have 6 months of living expenses put away as a cushion against unforeseen circumstances?
- Are you in a position to increase your current cash flow in order to generate additional "excess cash" for investment?
- Have you had a discussion with your CPA about opportunities to minimize tax liabilities, including the deductibility of mortgage and investment expenses?
- Are you optimizing your investments to meet your need for current or future income? Are you taking advantage of tax free or tax deferred products where appropriate?
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| For help with Cash Flow Planning or Tax Efficient Investing Strategies1, contact the Private Client Group
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3. Look at ways to put your "excess" cash flow to work for you.
What should you do with excess cash (not needed for ongoing living expenses)?
- Savings — Keep enough readily accessible cash to cover at least six months of living expenses. Beyond that amount, look for a savings tool that will pay a higher return on investment.
- Debt reduction — Are you better off paying down debt or using excess cash for other purposes, including longer term investment? That depends upon your personal situation and tax bracket, and whether the debt you are carrying is tax deductible (such as mortgage and home equity credit line debt) or not (such as consumer debt)1.
- Investments — Structure an investment portfolio which protects you from the effects of inflation. Your portfolio should reflect your short- and long-term financial objectives, risk profile and time horizon.
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Cash flow planning glossary1
- Asset allocation — The assignment of investment funds to broad categories of assets.
- Excess cash flow — Income from all sources minus expenses over any given period of time.
- Inflation — The erosion of your purchasing power over time as the price of goods and services increases. With inflation, a dollar returned in the future is not worth a dollar today. The effect of inflation must be considered in any good investment plan.
- Return on investment — Return is sometimes confused with interest or dividends from an investment. The real rate of return on an investment is its total return: Yield plus appreciation, minus income and/or capital gains taxes.
- Risk profile — Your personal tolerance for investment performance volatility. Keep in mind that your risk comfort level may change based on many factors including the size of your portfolio, your age and changing personal circumstances.
- Tax deferred — Income on which you don't owe taxes until a later date. IRAs and some other retirement plans are tax deferred, as well as annuities and savings bonds.
- Time horizon — The time interval over which an investment program is to be completed (i.e., retirement, college education, etc.)
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| NOT A DEPOSIT |
NOT FDIC INSURED |
MAY LOSE VALUE |
NOT BANK GUARANTEED |
| NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY |
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This information provided represents the opinion of U.S. Bank and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Investors should consult their investment professional for advice and information concerning their particular financial situation.
1 This discussion is intended to be informational only and is not exhaustive or conclusive. U.S. Bank and its representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. You should consult your tax and/or legal advisor for advice and information concerning your particular situation.
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