The quantified cash flow plan

The great thing about cash flow planning is the results are easily quantifiable.

That’s because you set multiple short-term goals when your advisor helps you manage spending and debts. As you achieve those goals (you may build an emergency fund or go on a long-awaited vacation), you’re able to track your progress and see how your hard work is paying off.

You and your advisor should also develop an action plan that spells out the steps you need to follow to reach your goals. Following specific steps will help you stay on track.

The problem is there’s been no standard definition of what financial plans should include. Also, traditional financial planning revolves around long-term savings estimations and investment goals, which can easily be altered by factors such as inflation, market performance and major life events.

In contrast, here are three reasons cash flow planning results are easier to predict and quantify:

• Money found. At the start of the cash flow planning process, you’ll see exactly how much money per month you can redirect toward the life you want. Your advisor can show you how you can get ahead in the near term, as well as what you can achieve in the next 10 years, by harnessing inefficient interest and wasted money. For example, you and your spouse may make $8,500 per month but also have about $300,000 of total household debt. If you find you’re spending more than you make prior to developing a cash flow plan, your advisor can help you realize a value of $150,000 of found money over the next seven to 10 years by helping you reorganize debts and adjust spending. When your cash flow plan is in place, you’ll find you can save about $1,700 more per month; 30% of that can go toward debt principal; 40% can go toward long-term investments and savings; and 30% can go toward protecting your plan.

• More enticing goals. Unlike traditional financial planning, cash flow management allows you to also focus on attaining your shorter-term, more exciting goals. Long-term goals are important, but you may be more motivated to save if you’re looking forward to an upcoming trip to Mexico.

• Behavioural changes. Cash flow planning encourages you to review your bad habits and change your behaviour. If you’re successful, you’ll see you’re headed toward long-term progress.

Stephanie Holmes-Winton is a Halifax-based financial services educator and speaker.