Personal Cash Flow – What is it and why is it important?

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One of the first steps in the financial planning process is organizing all the various facts of a person’s financial life. This includes income, savings contributions such as 401ks, outstanding liabilities, insurance and benefit information, and expenses, among other things. One of the most important outputs of this process, on top of having a more organized life, is what I call a Personal Cash Flow (PCF) statement. This is similar to what you would see from a business and is absolutely critical to the financial plan. So what is it and how is it put together?

A PCF statement is looking at your net cash flow on a monthly basis and is what you have left after meeting all of your financial obligations. This number should be positive over time but there may be months where it is negative, for we all know that life happens with unexpected expenses. If it is a positive number, for financial planning purposes, we assume that money is spent, used to reduce debt, or invested. If it is a negative number we work on budget choices to get it back to positive. You can probably see why it is so important to financial plans. To reach your financial goals you have three inputs: first, the amount of time between now and your goal date; second, the rate of return you can achieve on your investments; and third, the amount of money you can invest. The factor that you have the most control over is the third and this is the output of the PCF statement. So, how do we get there?

There are any number of tech tools that you could use (I use Emoney for our clients) but you could also use a simple spreadsheet.


Let’s look at the various inputs in more detail.

This is, as you would guess, all the income you and other family members receive. If you are a salaried or hourly employee, you can use your take-home pay (after taxes, benefits and 401k contributions) to make the calculation simpler. Just make sure you do not double count anything that is taken out of your paycheck. Also include any miscellaneous income such as rent or side job income.


Fixed Expenses
These are the expenses that you know you will incur monthly and you have a good idea what the cost is such as rent or a mortgage, car payments, monthly subscriptions, etc. I advise clients to include utilities such as the electric bill in this category using a 12 month average. Also, if you have an expense that occurs once a year, spread that out over 12 months. For example, if your car tax is $300 record a fixed expense of $25 every month even though it is paid all at once. This just makes the calculation easier and cleaner. The fixed expense number will make up the majority of your monthly cash outflow.


Estimated Expenses (Discretionary Expenses)
This is what they used to call walking around money when we carried cash and is where some guess work comes into play. For a couple, I would recommend you estimate both individuals spending based on recent history. It will change over time but with a little detective work you can come up with a good estimate. If, through the planning process, we have discovered some budget issues (a zero or negative net cash flow number) this is the first place that we look to see what is going on. It is important to realize, that to be financially sound, this cannot just be what you have left after paying your fixed expenses. It should be a reasonable number based on your life choices and financial goals.


Now that you know the inputs here is the formulae
Income from all sources – Fixed Expenses – Estimated Expenses = Net Cash Flow

You might look at this and say this is simply a budget. I think it differs for a couple of reasons. One, a budget implies that you are trying to change your spending habits and that may be needed for some people but not for others. I have clients that have been spending the same amount on the same things for years and are perfectly on track for their financial goals. Second, budgets tend to be aspirational.  This is a statement of what is really happening so it can vary from a budget to a wide degree. As a financial planner, I need real numbers to put together a meaningful plan.

I help clients put together and update Personal Cash Flow Statements as part of the planning process. I hope I have explained, in enough detail, how you could do this yourself but if you need help or have questions let’s talk.


// If you would like more detail, here is a sample report. This is a fictitious client we use for demonstration purposes and the ‘Planned Savings’ is the Net Cash Flow number.

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