Effective Cash-Flow Planning for Financial Success

As financial planners and advisors work with clients to manage their finances, creating a budget can be an effective starting point, but sometimes, even with the best planning, clients may fall short of their goals. This is often due to the tendency to inaccurately estimate discretionary spending. Stephanie Holmes-Winton, founder and CEO of CacheFlo Inc., emphasizes the importance of cash-flow planning, which goes beyond budgeting by providing a more in-depth understanding of how and why people spend, ultimately creating an actionable plan to address these issues. Cash-flow planning separates expenses into three distinct buckets: committed expenses, spendables, and goals or "money found".

Key Takeaways:

• Committed expenses include fixed bills that do not change in a given month, such as mortgage or rent, car payments, child care, and utilities. These are non-emotional, most are fixed or predictable expenses.
• Spendables, or "emotional purchases," are the things that bring clients the most joy, such as groceries, children's extracurriculars, or vacation expenses. This category is more likely to vary each month.
• Allocating 20 to 25 per cent of a client's take-home income toward spendables can help balance discretionary purchases.
• A predetermined amount can be transferred automatically into a separate spendable account each week, encouraging clients to stay on budget.
• The use of a debit card, not a credit card, for spendable accounts helps avoid overspending and limits the temptation to accumulate debt.
• Credit cards with loyalty points can be used for committed purchases, and the balance can be paid off automatically to avoid interest charges.
• The bucket system creates more funds to put into the goals category, as clients have more control over their spending.
• An account structure makes it easier for clients to stick to the plan and make progress toward their financial goals