A cash flow plan is not the same as a budget. Often, when people are trying to make the most of their finances they look to a traditional budget. Budgeting tends to involve using past spending patterns to guess how much you’ll spend on various categories in the future. For most people, managing multiple categories and trying to keep a mental or physical account of everything you’ve spent isn’t sustainable in the long term. Our brain gets tired, we get off track and, before we know it, we’re right back where we started.
Unlike traditional budgets, a cash flow plan doesn’t focus on what you can’t have or require you to manage a million little categories. There are no jars, envelopes, spreadsheets, or lectures about whether or not you’re allowed to buy a coffee.
A behaviour-based cash flow strategy takes into account your income, expenses, proximity to retirement (or other significant goals), assets and liabilities, and provides you with a personalized spendable recommendation. Rather than trying to manage expenses across multiple categories based on what you think you’ve spent in the past, a cash flow plan provides you with a specific recommendation on how much you can safely spend each week on the things you can control. You get to focus on what you can do to make the most of your finances going forward, instead of getting stuck in the past.
Debt management is another crucial element of a cash flow plan. It’s much easier to get into debt than it is to find holistic debt management advice that helps you pay it back efficiently. A well-developed cash flow strategy can help you balance paying down debt with saving for your future. Debt needs to be managed with the same degree of rigour as your assets. A cash flow plan helps prevent the liability side of the balance sheet from eroding the nest egg you’ve worked so hard to save.
If one or more of the following statements is true for you, you may need a cash flow plan.
10. Your retirement plan is not fully funded, and you don’t feel confident you can prove that you’ll have enough to retire.
9. Your retirement goals and plans are based on replacing a percentage of pre-retirement income, rather than on your projected retirement expenses.
8. You don’t feel like you can afford enough life insurance to pay off all of your debts and protect your family from the loss of your income in the event of your death.
7. You are leasing a car you couldn’t have afforded to buy over 36 months or less. Or, you’ve taken out a car loan that's more than 48 months.
6. You don’t know what year you’ll be entirely debt-free.
5. Your TFSA is not maxed out.
4. You are retiring in the next 20 years and will have to live at least partially off investable assets.
3. You cannot afford to burn money for fun.
2. You’ve had to withdraw money from a long-term investment account, or stopped regular contributions towards your retirement because of an emergency, or to pay for something that isn’t retirement.
And the number one sign that you need a cash flow plan is…
1. You don’t have a cash flow plan!
Cash flow planning was designed around human behaviour. It makes it easy to do things that will improve your financial health, and more challenging to do something that will ultimately hurt you. One of the reasons this works so well is that this type of approach bridges the knowing-doing gap. You don’t just find out how much is safe to spend based on your financial situation. You also learn how to set up your financial environment in a short series of one-time changes that make it easier to stick to your plan. In most cases, a cash flow plan can help free up at least $1,000/mo to help you fund your financial goals.
Unfortunately, getting a cash flow plan is no guarantee that you’ll free up money. But if you go through the process and discover you have low, no, or worse, negative found money, don’t panic. When a cash flow plan cannot help you free up an impactful amount of money each month, it generally means that your committed expenses (i.e., your bills) are too high. When that happens, it tells us that no amount of managing day-to-day spending will help. In those cases, more significant life changes need to be made. Sadly, most people in this situation could get by for years, slowly digging themselves into a financial hole that gets deeper as time passes. They could have avoided so much financial pain by knowing what type of changes would help the most, and a cash flow plan will flush that out quickly.
Also, many people would be a lot happier and financially healthier with a cash flow plan. But, they rarely have one. Instead, we most often deal with issues of cash flow when trouble has already hit. We buy the fire extinguisher when the house is already engulfed in flames.
If any of these 10 signs are true for you, reach out to your financial advisor or institution today and ask about their behaviour-based cash flow advice offerings. If you have cash flow, you can likely benefit from a cash flow plan!
CacheFlo is a financial education company that builds eLearning and tools to help financial professionals and individuals make behaviour-based changes, that allow them to get more life from their money. We want to make it easier for people to predict the impact of their financial choices before they make them.
About the Certified Cash Flow Specialist (CCS) program
CCS professionals go through enhanced cash flow-based training to develop the skill set to deliver behaviour-based cash flow advice. They tend to start the financial planning process with a cash flow plan to genuinely help their clients get more life from their money.