Mel's Monthly Money Tips: Managing Your Inflow & Outflows and Balancing Your Assets & Liabilities

Series Intro:

The New Year is bringing with it a new monthly blog series highlighting the most important aspects of financial planning. This series will give clients and readers a glimpse into the different areas of a financial plan, provide practical steps on how to prepare your own planning documents, and ensure that all the core areas of your financial life are covered. This month's post is focused on understanding cash flows and net worth.

What is a Cash Flow Statement?

The main purpose of a cash flow statement is to determine how your money is being spent and to show your net cash flow for a specific period of time. When completing a cash flow statement, you should list out all your income sources and all your expenses. Ideally, a year’s worth of data should be gathered, to even out the impact of seasonal variations.

Cash inflows generally include the following:

• Salaries

• Interest from savings accounts

• Dividends from investments

• Capital gains from the sale of financial securities like stocks and bonds

Why Should I Have a Cash Flow Statement?

The purpose of determining your cash inflows and outflows is to find your net cash flow. Your net cash flow is simply the result of subtracting your outflow (expenses) from your inflows (income). A positive cash flow is good news—it means you have some money left over from that period. A negative cash flow means you spent more money than you brought in. Analyzing your net cash flow can provide insight to your spending behavior and present opportunities for financial growth.

Developing a cash flow statement is one of the first steps when it comes to creating a financial plan. If you are interested in creating your own cash flow statement, start with the Personal Cash Flow Worksheet provided at the end of this blog post.

What is a Net Worth Statement?

Your net worth statement is a snapshot of your financial health, at one particular point in time. It shows you what is owned (assets), less what is owed to others (liabilities). If your assets are greater than your liabilities, then you have a positive net worth; if assets are less than liabilities then you have a negative net worth.

Why Should I Have a Net Worth Statement?

Preparing an annual net worth statement allows you to keep track of progress toward meeting long-term financial goals. Certainly, there are times when your net worth might not seem very attractive from a numerical value (e.g., when you have outstanding student loan debt), but this shouldn’t discourage your drive to reaching a positive growing value. A net worth statement is also a useful planning tool. By reviewing a net worth statement, we can determine if you have too few liquid assets (for emergencies) or that investments are too heavily concentrated in one area.

If you are interested in creating a net worth statement for yourself, see below for an example using a sample client.

If you have any questions on how to create any of these financial tools, please reach out to me at [email protected]!

Resources:

https://www.investopedia.com/articles/pf/08/evaluate-personal-financial-statement.asp

“Concepts for Financial Professionals” written by Cannon Financial Institutes

Documents:

Personal Cash Flow Worksheet

Net Worth Statement