Does your cash flow align with your goals?
Your cash flow is the starting point for all of your financial goals. If your goals and cash flow are not aligned, you may have to revisit what is realistic or how your cash flow could improve. A cash-flow analysis can help you identify a budget and savings plan that aligns with both your long-term and short-term goals. In addition, this analysis can aid in planning for large purchases or defining the most beneficial strategies towards debt repayment.
A few of the ways a cash-flow analysis can help aid in your decision-making include:
Understanding your savings requirements
How much should you have in your savings account, emergency fund, and in investments? Once you understand how much you need, do you know how much you should have on hand as cash versus in investments? An advisor can work with you to identify target amounts and assist you with an investment strategy.
Analyzing your spending and determining how much you can safely spend
What are your long-term goals and does your current spending (connected to your short-term goals) align with your future needs? Are there any expenses you can safely cut? Are you taking advantage of credit card rewards and using your credit card wisely so as not to affect your credit?
Evaluating your loans/debt to determine a repayment plan
Do you know which debt to pay off first and if it is beneficial to repay a loan faster than required? Would a home equity line of credit (HELOC) help you achieve your goals without hurting your future? Your advisor can help you evaluate repayment plans, refinancing options, and debt strategies whether your debt is connected to student loans, credit cards, mortgages, or other sources.
Planning for home purchases
Understand how much you can put towards a downpayment and how much home you can comfortably afford without compromising your financial future. Your advisor will also help you analyze mortgage rates and refinancing options to determine your best options.
I created a budget and put 20% into savings, is that enough?
There are many different recommendations out there for how much of your paycheck you should spend versus save. While focusing on saving in general is highly beneficial to your financial situation, a cash-flow analysis and financial advisor can help you create a plan that is tailored to your unique situation and both short-term and long-term needs.
Common Questions Related to Cash-Flow Analysis
Why is cash-flow planning important?
By understanding your monthly cash flow, you can determine if you have enough to meet your financial obligations and fulfill your goals. In addition, you can determine what excess funds exist to develop a strategy for their best use. Effective cash flow planning can help reduce financial stress and offer confidence over your financial situation.
My cash-flow is inconsistent due to seasonal changes in my income. How should I address this?
A cash–flow analysis is especially important for professionals who have inconsistent income and thus varied cash flow. Without a consistent cash flow, it is challenging to set a monthly budget. By completing a cash-flow analysis, you can understand how to increase your savings during heavier periods of cash flows to offset cash flow challenges and decrease the likelihood of being forced to take on debt.
If I have an excess of funds, should I pay off existing debt?
It depends. What are the interest rates on your debts? In some instances, it may be better to keep the debt if the interest rate is lower than your estimated return from investing the funds. In other instances, such as if you have a high amount of debt that is hurting your credit or if debt causes you emotional strain, it may be worth paying your debt off early. A financial advisor can help you evaluate which debt would be the most beneficial to pay off early and understand how doing so would affect your ability to achieve your goals.
Lower your stress with a financial plan.
Cash-flow planning is an integral part of financial planning as it analyzes your income and expenses to determine your monthly budget and savings plan. By having a plan in place that is designed to meet your needs, you can worry less about your finances and spend more time living your life.
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