By Jon L. Ten Haagen, CFP ®
The first step in cash management is to assess your current situation. Effective cash management is really just getting a realistic view of how much of your money is available to spend. Without adequate information, you could get yourself into trouble. Be careful when you use tomorrow’s dollars to pay for today’s needs.
To assess your current situation, start by making a list of your monthly income. Continue until you’ve determined exactly how much income is available to you on a monthly basis. List all your fixed expenses. These are expenses that are the same every month – like the mortgage, rent, and car payments.
Next, list the monthly averages for any non-fixed expenses. Items like the electric bill and fuel which may vary widely from season to season. Figure the monthly average and list that number. Non-monthly periodic expenses need to be calculated to fit a monthly time frame.
Be honest with yourself. There’s no benefit to trying to manipulate these numbers. Once you’ve listed everything, compare your income and expenses. There are several items to evaluate. Determine which expenses are fixed and which are flexible. You may be able to reduce the ones over which you have control. Shortfalls can create havoc with anyone’s financial situation. Surpluses, on the other hand, are terrific – if you invest or save. Consider paying your car insurance once a year. That will save you the monthly surcharge for the privilege of paying monthly. That could be $5 per month.
Here is a worksheet you can use to determine your net cash flow. It can help you to track monthly income and expenses and determine your discretionary income.
Cash flow worksheet:
Salary, tips, wages: $______,
Business income: $_____
Investment: Taxable interest (from CDs, savings accounts, etc.) $____,
Non-taxable interest (from muni bonds, etc.) $____,
Dividends (from stocks, mutual funds, etc.) $____,
Rental Income $____,
Partnership income $____.
Social Security benefits: $____,
Other Income: $____,
TOTAL MONTHLY INCOME: $____
Monthly Expenses: Taxes, Federal income taxes, State income taxes, FICA (Social Security) / self-employment, Real Estate taxes, Loan payments: mortgage or rent, automobile loans, Credit cards, education loans, other installment loans. Insurance: life, auto, homeowners, LTC/disability income, Medical/Dental, Liability, Disability. Household: food, clothing/laundry, Utilities (electric, heat, water, phone, internet), household repairs/maintenance, auto expenses (fuel/maintenance), other transportation, Recreational/travel, Entertainment/dining, Charitable contributions, Unreimbursed medical/dental, Child care, Education expenses, Other expenses,
TOTAL MONTHLY EXPENSES: $____.
Net Cash Flow: Total monthly income minus total monthly expenses = Net Cash Flow. Do you have a plus or a minus?
Here is a self-analysis quiz. You may have taken great steps toward planning for your financial future. Even if you haven’t, don’t despair. It’s never too late (or early) to get started. The exact amounts for insurance and savings depend on your specific situation. Here are some general guidelines you can follow. If you have questions about any of these give us a call to discuss and get you going in the right direction. That is why we are here and why we write these columns.
1 – Do you have enough money set aside in a readily accessible cash reserve account to cover at least three months of living expenses? (I prefer to see nine months of reserve): Yes or No.
2- Do you have sufficient life insurance coverage? And the correct type of insurance?: Yes or No.
3 – Have you established an adequate long-term-care plan?: Yes or No.
4 – Have you (and your spouse) established a habit of investing regularly?: Yes or No.
5 – Are your investments diversified among several asset classes?: Yes or No.
6 – Do you know your federal income tax bracket?: Yes or No.
7 – Are you participating in an employer-sponsored retirement saving plan (such as a 401k) or making regular contributions to an IRA?: Yes or No.
8 – Have you (and your spouse) made an estimate of your retirement needs?: Yes or No.
9 – If, so, have you compared your estimate with your estimated income from retirement plans, Social Security and other investments?: Yes or No.
10 – Do you have a current will? One you have reviews after the last life event which has occurred?: Yes or No.
The cost and availability of life insurance depends on factors such as age, health and the type and amount of insurance purchased.
1 – What are your dependents annual living costs? (Include mortgage payments and other loans) $____
Spouse’s income $__________
Investment income $________
Social Security $____________
Other income $____________
Total income available $_______
3 – How much additional income would your family need? Subtract the total on #2 $______________
4 – What return could they expect on investments? $________________
If you have questions on how to go about this exercise please reach out to us. That is why we are here and writes these articles, for your benefit. No one is going to do this for you and the sooner you take control, the easier it will be to attain your retirement goals and needs. Remember, the only dumb questions are the ones not asked! The very best and we will see you in two weeks. Have a great fall season.