In the last year, I have experienced an immense amount of both professional and personal life changes: transitioned to a new role here at SWP, moved in with my girlfriend, and asked my girlfriend to become my fiancée, just to name a few (spoiler, she said yes). Add COVID to the mix, and it’s safe to say that calling this year “eventful” would be an understatement.
Although it is challenging to find the silver lining in a global pandemic, it did allow more time for my fiancée and I to talk about our future and what was really important to us. We discussed weddings, family, life goals, and dreams, which ultimately turned into a discussion about how to plan financially to achieve what we want out of life. Inevitably, all roads led back to a concept most of us do not enjoy thinking about: cash flow.
A cash flow analysis can be stressful even when we’re on our own — adding a partner to the equation can intensify those feelings. So why go through the (sometimes painful) exercise in the first place?
To oversimplify, a cash flow analysis makes you more aware of your spending, which in turn makes you more aware of your financial habits. And ultimately, that’s all a cash flow analysis is: self-awareness! And this statement holds true for everyone, regardless of net worth.
Focusing on our cash flow opens our eyes to where our money is going and helps us evaluate whether our spending aligns with our financial goals. It may feel like a granular exercise, but it creates a greater understanding of the bigger picture. There are many different approaches to a cash flow analysis, but here are a few steps you can take to get the ball rolling:
- Calculate your cash inflow from your income sources
- Identify cash outflows and categorize them based on expense type
- Segment high-dollar cash outflows into “needs” versus “wants”
- Track cash inflow and outflows and review annually or quarterly
The process is not as rigid as it might seem, especially once you get in the habit of performing regular cash flow analysis. Most importantly, it helps you become more aware of where your money is going and allows you to strategically assess if your spending is conducive to reaching both your short-term and long-term goals.
The part that many find most impactful is breaking out high-dollar expenses into “needs” and “wants.” Do you need to upgrade your boat to a 40-foot luxury cruiser? Probably not. But do you want to upgrade, and will the cost of upgrading have a minimal impact on your cash outflows and your long-term financial plan? If the answer is “yes,” then it’s a purchase you can justify. This same mindset can be used for all needs-versus-wants discussions, not just the big-ticket items: deciding if you should buy a new sofa for the living room or determining if you should get a coffee on the way to work each morning.
The point is not that you should analyze your spending down to the penny every month; rather, it is to make the connection that cash flow analysis can promote awareness. A cash flow analysis goes hand-in-hand with financial planning — which, as our clients know, we view as the foundation for all personal finance.
If you would like to learn how to manage your cash flow more effectively, or if you just want to understand your cash flow better, reach out to the team at SWP to get the conversation started.