After all, most of us do not inherit wealth, so, if we are going to gain it, we must build it. And for most of us, the opportunity to build wealth exists, over time, as we turn our ability to earn an income into cash flow from which we “capture” financial assets. We capture financial assets by spending less than we take in.
It is useful to consider three aspects, or steps of cash flow planning:
- Cash flow analysis – researching historical cash flows to understand the current situation.
- Cash flow planning – considering where changes should be made to cash flows in order to accomplish prioritized goals.
- Cash flow management – having the discipline to stay with the plan.
If steps 1 and 2 have been properly executed step 3 is much easier. That is, if you have carefully considered your prioritized goals, your current situation, and what steps must be taken to accomplish your priorities you will have the motivation necessary to adhere to your cash flow plan. If you know the “why” (your goals) you can figure out the “how” (the discipline.)
The discipline of cash flow analysis, planning and management is one of the most important components of a successful financial plan.¹
You should monitor your blood pressure, and you should monitor your financial progress.
My medical adviser wants me to come in periodically so that she can check my blood pressure, temperature, heart rhythms, cholesterol ratios, etc. Apparently, that’s important for accomplishing my physical goals. You know, like continuing to live.
We recommend that our clients come in periodically so that we can check their cash flows, net worth, insurance, employee benefits, etc. Our experience over many years confirms that those clients who regularly and routinely come in to review their plans with us are more likely to accomplish their financial goals.² Apparently this is also important.
¹ The cash flow planning component of a financial plan is sometimes referred to as a budget. We prefer the term “spending plan” – it’s your plan for spending your money. Importantly, your spending plan must include some portion for “fun stuff”. Otherwise, you will likely “fall off the wagon” and your plan will fail. The good news is this: if your plan (and remember, it’s your plan) allows you to spend a specified amount of dollars for vacations, movies, beer, picnics, concerts, etc., then you can spend those dollars on those things without remorse.
² These days “coming in” is just as likely to be accomplished via video conferencing.