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MAKING CENTS OUT OF THE NEWS
Blog #3
(January 15h, 2009)
BACK TO THE FUTURE WITH CASH FLOW CONTROL
By Tom McAllister, CFP™
An article in the December issue of the Journal of Financial Planning caught my eye. In our daily work of advising our clients, sometimes we CFP® types forget to tend to the basics. We’re busy with concerns about “important things” such as market volatility, asset allocation, economic and political issues, etc.
Probably the most basic of all financial tasks is cash flow analysis. In the Journal article, our colleague, Eric Kies, CFP® of Denver, Colorado, calls our attention to the importance of clients having a thorough knowledge of where their cash is coming from and where it’s going. Kies suggests we think of our cash as being in three different “buckets”, which he defines as follows:
The Static Account. This account holds our thirty-day money. This is what it takes to run our household for a month, including mortgage, utilities, car payments, and insurance.
The Control Account. This is our seven-day money which we will spend in the next week on lifestyle expenses, groceries, fuel for the car, dining, recreation, hobbies, clothing, personal care, etc..
The Dynamic Account. This account funds all future expenses, from vacation trips to education, gifts, retirement, taxes, and auto purchases.
The Static Account is a reflection of our past decisions, the Dynamic Account represents future decisions, and the Control Account illustrates our present state. A simple analysis of these three numbers allows us to understand what we are doing with our cash, and how we are making financial decisions.To one degree or another, after all, these decisions can be changed. We can “downsize” our homes, our cars, and our lifestyles in general. We can change or cancel vacation plans, auto replacement schedules. In most cases, we have the power to defer our retirement date. Few of us find adjustments appealing, and not in all cases is downsizing needed. My point is that all of us have a degree of control over where and when we deploy our resources and specifically over how we direct our cash flow.
It’s very interesting to trace our federal government’s cash flow management throughout the history of our country. In 1835, under President Andrew Jackson, the U.S. Federal Budget was balanced and the national debt paid in full. This has never happened since. In the 1920’s, the Federal Budget ran surpluses for ten consecutive years. This also has never happened since.
In the 1930’s, depression and war began a time of chronic deficits, and, during the 70”s and the 80’s, there were deficits for twenty straight years. There were four years of surplus in the late 1990’s, but since that time the U.S. Federal Budget has dropped dramatically back into deficit territory, and our national debt is higher now than at any time in our nation’s history.
While I can opine on the U.S. budget deficit, my financial advice as not been directly solicited by our national economic advisors. Even when it comes to my own financial planning clients and readers of my blogs, I am not necessarily recommending they cancel vacation plans or downsize their homes. My message is simply this: cash flow management is crucial to sound financial planning, not to mention peace of mind. And whether we’re talking abut the nation’s cash flow or our own, the principles are the same. If we are not pleased with our financial circumstances, we can expend energy being frustrated, convincing ourselves we’re “locked into” our current circumstances, or we can take steps to analyze and then better manage our cash flow, thereby “breaking the lock”!
With all the rapid changes in our economy and in the investment markets, there are many investors who would benefit from more consistent guidance. We are currently accepting new financial planning and investment clients, and would appreciate your referrals.
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