As a financial advisor for CIP/Pentad, I need to know a lot of information about a client before being in a position to make appropriate recommendations. One of the key pieces of information I need to know is what cash inflows (or income), and what cash outflows (or expenses) they have.
What’s interesting is that pretty much everyone knows what their income is. They can easily identify their fortnightly or monthly income from their bank statements. However, a surprising number of people can only guess at their expenditures.
This information is fundamental to any recommendation, be it debt reduction or wealth accumulation.
For example, say you have $60,000 of income per year (after tax). Say, you make an educated ‘guess’ that your expenditures are about $48,000 per year. On paper at least, that would suggest that there is a cash flow surplus of $12,000 per year that can be ‘captured’ and applied to debt reduction or investment. However, what if actual expenditures are not $48,000 per year but more like $60,000 per year? You can see the problem here.
In the planning process, we need to do better than ‘guess’ at expenditures. We need to be pretty confident that cash inflow, as well as the cash outflow have been ‘road-tested’ and are reasonably close to reality.
How do you best get a handle on the amount of your expenditures? Well, there are plenty of online budget programs available. If you don’t feel the need to get down to that level of detail, a simple review of your credit card and bank account statements will give you a good sense of your cash outflows. Use a reasonable period, perhaps the last 12 months, and simply tally up all the cash outflows. Remember, in the planning process, cash flow is king!