Don’t believe the hype.  This is not an easy thing to do.


Many well-known financial celebrities and writers make it sound easy, but for most people it isn’t.  This is the biggest challenge that people face when they set out to create a financial plan. This challenge affects people at nearly all socio-economic levels.

I’m talking about CASH FLOW.

Cash flow, simply stated, is the way money moves. Understanding and controlling cash flow is like trying to break a wild horse.  This horse does not want to be controlled.  It wants to run free with hundred dollar bills spewing from its nostrils.

But once that horse has taken to the bit, you can ride it where you want to go, toward your most important goals.  Care for that horse, and it will care for you

For people who are just starting out in life and without much in the bank, getting a grip on cash flow early can set the stage for future success.  For people in transition (e.g. divorce, retirement) this might be the first time that you have had to consider the important equation of ‘money-in minus money-out’ and how it affects the sustainability and growth of your wealth.

There are six key steps to gaining control of your personal cash flow.



Start by gathering data.  Review your bank statements.  If you pay by credit card, then request an annual report showing a breakdown of your expenditures by category.  It is also important to look forward.  Identify the expenses that you can expect in the future.  If your hot water heater has a 7 year lifetime, and it is 6 years old, then you should probably plan to pay for a new one in the coming year.



At this point, you should have a stack of paper and pages of notes.  It is likely that some of this information has startled you.  ‘We spend how much on dining out?!’  Next we need to turn that raw data into something usable.  Distinguish between true one-time expenditures versus those expenses that are recurring

I find it useful to categorize expenses as either ‘fixed’ or ‘discretionary’.  Your car insurance payment is steady and needs to be paid every month.  However, your vacation spending is a discretionary expense and you may have more control over the items in the discretionary category.

Be sure to use a consistent time period when analyzing income and expenses.  A quarterly water bill might need to be converted into a monthly or annual average to ensure a fair estimate.

One cash flow item is particularly troublesome, the home.  What will you need to fix next year?  What is due to be replaced?  What home show will you watch that will make you want to finally add on the backyard patio and she-shed?

There are no easy answers to creating a home’s maintenance and improvement budget, but we encourage clients to undertake a review of your homes major systems.  How old is the driveway, and how frequently should it be re-sealed?  When will the roof need to be replaced?  When should it be re-painted?.

Make a list of home improvement projects that you might want to take on.  How much will each project cost?  Then, consider what might be a reasonable annual average expenditure for the home improvements that you have not yet conceived.



No two budgets are the same because no two households are the same.  Different families have different preferences, values, and beliefs.  The reason that goal setting is such an important part of the financial planning process is that it gives you a target at which to aim.  Make sure you are choosing the right targets.

A good place to begin is by looking at your spending over the past twelve months and asking why it was necessary to spend that much on each item.  What is the minimum amount that you could have spent on each necessity?  Anything above the minimum is a choice, and it can be prioritized.

Next go through and rank each expense in order of importance to you.  Which is more important to you; the luxury SUV or taking your kids on an exceptional family vacation?

Then, consider the money you have saved.  What are the important goals that you seek to achieve?  Which of those are most important?

You can of course go much deeper as you plan for the future.  What will be needed to fund your minimum retirement, and how much more will you need to fund your optimal retirement?  The calculations can be hard to manage without a good financial planning tool, but they are critical.

Your spending decisions today will affect your ability to fund the goals you have for tomorrow.  In this way, the process of analyzing your cash flow is like a negotiation with your future self.  Is it more important for me to have four premium channel subscriptions today, or to buy a winter home in Florida for my retirement?

Income must also be examined in the context of your priorities.  To achieve your goals would you take on more hours at work or a pick up a second job on weekends?  Is it possible that you will want to decrease your hours at work to have more time with your family or to care with your parents?

By identifying your planning priorities, you put yourself in the best position to start making effective decisions when managing your cash flow.




With our priorities firmly established, we can now start looking at the year(s) ahead.  This step involves the word that most clients dread; budget.  To many, especially those who are less analytical, a budget is a cruel tyrant.  Who does my analytical left brain think they are, trying to tell my impulsive and creative right brain how to spend money?  This is the wild horse, bucking and thrashing as it tries to through off the bit and crying ‘live for today!’

I believe this reaction occurs when a budget is created before the pre-requisite work of steps one, two, and three has been completed. You have to prepare yourself to budget by convincing yourself that it is necessary and that your goals are important.  Hopefully, you are now in the right place to accept a plan; a blueprint for your finances.

You create line items for everything on which we expect to continue spending money.  You create line items for the expenses we incurred in the past, but have not yet paid (debt).  You create line items to save for the things we will need in the future.  You also create line items for the unexpected.  You then enter the amounts from our preparatory steps, and you gaze at your new creation, the family budget.


Allocation of Surplus/Correcting Deficits

With your budget in hand, you might not like what you see.  Your first reaction might be, ‘yikes!’  You might mutter, ‘how could I have possibly spent that much on dining out?’  For better or worse, this is your tool.  This is how you will tame the wild horse.

If your first draft of your budget shows a deficit, then ask why.  If you are retired, we might expect that your expenses will exceed your income and that you will need to take a distribution from your investment portfolio to satisfy those needs.  If your distribution rate is too high, then you will need to review your priorities and make cuts in your expenditures. [We will cover the topic of sustainable distribution rates in future posts.]

If you have a budget deficit, and you are still working, then you need to pull back on the reigns and make some serious changes before you ride that horse off a cliff.  Depending on your situation, the impact on your life of a new spending plan might be mild or radical, but there is almost always a solution, if you have the will to change.

To increase your income, you might consider pushing for a raise at work or grabbing a part-time gig.  Downsizing a home can reduce ongoing expenses and create assets that can be invested for additional income.

Much easier to consider are the changes you can make when you identify a budget surplus.  How do you want to use this ‘extra’ money?  You can decide how best to apply the surplus funds before it seeps into your lifestyle spending.  And it will disappear into the ether if it is not contained.

If your budget reveals a surplus while you are carrying debt, then accelerating your debt repayment schedule is a great place to start.  You may choose to balance debt repayment with the establishment of an emergency saving reserve of 3 to 6 months of planned expenditures.

By saving and investing the surplus, you might be able to reduce your taxes and achieve your retirement goals sooner.  You might be able to improve your lifestyle, give more to charity, or reduce the risks to your financial well-being.  Identifying a surplus gives you permission to explore aspects of your life and relationships that you may not have previously considered possible.  [The concept of ‘permission’ will be covered in an upcoming post.]

Conceptually, it helps to save the planned amounts at the beginning of the month, and only spend the amount that is left.  Stick to the budget.  Keep the horse in the corral.

There are many practical financial planning elements that should be considered when deciding how to allocate surplus.  You may not be doing it as well as you might, but hey, at least you have some surplus to allocate.



Review is often the most underappreciated element of any ongoing comprehensive plan.  This is especially true with cash flow analysis.  A plan is only as good as the inputs, and only by reviewing the outcomes can you see if it is an accurate representation of your finances.

Your final budget will allow us to set specific goals.  For example:

  1. I will pay off my the $9,500 loan on my car.
  2. I will contribute $26,000 to my 401(k) plan.
  3. I will increase my savings account balance by $12,000.

These are quantifiable outcomes that can be measured.  If you only increased your savings by $6,000, then what happened to the extra money?  Was your income lower than expected?  Was your spending higher than expected?   This feedback loop will help make your budget more accurate.

The rewards of cash flow planning are more obvious than the problems we have confronting it.  When we understand our resources, we can develop practical plans and expectations.

For a detailed cash flow analysis worksheet that might help you get started CLICK HERE.


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The Foundry Financial Group, Inc.