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Explaining cash flow to your clients
Advisors at Carte Wealth Management Inc. view the full picture of their clients’ financial health, including cash flow. Here’s how to talk to your clients about what cash flow is, why it matters, and how they can manage it.
What is “cash flow”?
Cash flow is the inflow and outflow of money to and from your account — your income and your expenses. The key to good financial management is to try to ensure that more money comes in than goes out. The timing of income and expenses can also be a factor in healthy cash flow.
How much money is coming into your account? Do you receive the same amount at regular intervals, such as every two weeks? Is your income from a single source or from many? Is tax deducted or do you need to set that aside to pay later?
→ TIP: Income will rise and fall throughout your lifetime. When your income increases, focus on saving more rather than spending more. It will help you weather the inevitable dips.
Managing your expenses
Like income, expenses change over time. Graduating or going back to school, having children, getting married or divorced, moving, buying a home, losing a spouse, approaching retirement — all of these can affect your expenses significantly. When major life events occur, review your budget so you are prepared for the financial changes ahead.
→ TIP: Remember that the amount of debt you carry also affects your monthly expenses. Try to avoid — or pay down quickly — consumer debts such as credit card balances, which are expensive to carry.
Balancing the budget
If your outflow of money is always higher than your inflow, you’re at risk of falling into debt. Take a look at your income and expenses, and change the things that are in your control.
→ TIP: You may find it easier to trim expenses than to increase your earnings. Look critically at discretionary expenses, such as entertainment, restaurant meals and fast foods, underused gym memberships, subscriptions, and so on. Shop around for better rates on insurance, phone plans and the like. Are there other ways to cut costs, such as taking transit to work instead of the car? By doing a critical evaluation of your expenses you may find an array of cost-cutting opportunities that you can leverage.
Timing is everything
Emergencies and unplanned expenses can derail the best of budgets and may lead to unwanted debt, especially if they occur when your bank balance is low. That’s why it’s important to plan ahead — for birthday and holiday gift giving, for example, and even for unexpected expenses such as vet bills or car repairs.
→ TIP: The best way to cope with extra costs is to save a little each month in an emergency fund. That way, you’ll be less likely to run up credit card debt that you can’t pay off.
Making a budget
The Ontario Securities Commission has prepared an excellent budget worksheet that can help your clients track their income and expenses for better financial management.