How “cash Flow Planning” Can Help Your Finances

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By Patricia Domingo

As a certified financial planner who has been helping clients for more than 20 years, I have found that most people shy away from the idea of ​​budgeting. Everyone assumes it comes with restrictions, and who wants to be restricted in their lifestyle?

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As a result, I have found that many clients lack a monthly budget, even those whose income is more than enough to cover their needs.

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I understand why clients hate budgeting in financial planning. I imagine it’s like my fitness and nutrition coach reminding me of my 10 pound weight loss goal and the need to keep track of my food macros daily. “I’ll do that right away,” no one ever said.

For this reason, I have changed my approach to clients and instead focus on “cash flow planning”. But what does it mean and why is it so important at all stages of life?

Cash flow planning can feel like an insurmountable task early in your career, especially during recent times of inflation. Salaries are at entry-level levels with minimal annual increases, while housing costs – rent or own – are at or near all-time highs. Add in inflated food prices, student debt, and/or taxes, and the list of costs can seem endless.

After monthly needs, there may be very little left over to cover discretionary expenses, let alone for a savings and investment strategy. But I like to remind my clients that spending even $100 per paycheck on investments is a healthy habit that can be built upon over time.

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Eventually, as you progress in your career or business, things start to feel a little better, and your income starts to match accordingly. There’s a balancing act between the amount you should pay toward your liabilities and the amount you should contribute to long-term investments. What goals should be the priority: an emergency fund, saving for a down payment, children’s education, or retirement planning?

Many customers are too conscious of their debts and want to pay them off quickly at the expense of building up fixed assets. However, various tax savings options (initial home savings account, registered retirement savings plan or tax-free savings account) and government subsidies (for a registered education savings plan and a registered disability savings plan) can make saving lucrative, especially at the beginning if time and the effects of compounding returns are on your side.

This is where cash flow planning comes into play. Once you know how much cash flow you have after paying for necessities, an advisor can help you figure out how best to allocate that excess cash flow between liabilities and savings. The best plan will be different for everyone and must adapt to each person and/or family’s changing situation. Therefore, it is essential that you have a professional guide you through the options on a regular basis.

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I find that cash flow planning is also extremely useful in risk management. As clients increase their investments and approach retirement, they are typically still interested in growth, but capital preservation becomes equally, if not more, important.

Every client’s nightmare is that the markets suddenly collapse when they retire. Therefore, it is important to assess what your investments will need to generate each year in retirement, in addition to your various public and private pensions, and to structure your investments according to your risk tolerance.

The transition to retirement is always a little worrisome for clients, regardless of their wealth. From a paycheck where your employer deducts enough taxes for you during your working years, you range from three to six different payments (Canadian Pension Plan, Old Age Security, private pensions, investments and payments into registered accounts) and it is your responsibility to determine how much tax should be withheld.

In later years of retirement, there may be higher costs for nursing care and/or retirement homes, which will also impact your finances. An experienced financial planner can help you plan for all of these considerations and simplify what can be a long and complex transition.

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The final phase of wealth is a phase of bequest and transfer. Once all of your goals and long-term needs have been adequately addressed, how do you plan to transfer the remaining assets, whether to family and/or to charity? Will this wealth be passed on during your lifetime or in your estate? Will it happen over a period of several years or all at once?

Using cash flow planning, we can also estimate your taxable income during your lifetime and in the event of your death. We can therefore advise you on how to make the most of asset transfers on a tax-efficient basis and thus increase the value of these gifts.

By now it should be clear that cash flow planning (ahem, budgeting) is an essential part of helping you achieve your goals and maximize your wealth at different times in your life. Now if you’ll excuse me, I’m going to work on the dreaded food tracking I’ve been putting off for so long.

Patricia Domingo is a senior portfolio manager, wealth advisor and financial planner at RBC Dominion Securities Inc.

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