Cash flow-based financial planning: Our complete guide (2024)

Your current financial goals may include protecting your assets, saving for retirement, setting up your new business for success or organizing your estate. Whatever your goals, intuitive financial planning can help you be proactive so that you are prepared when unexpected expenses appear. Financial planning can also help you comfortably meet your lifetime milestones, whether that means saving up for a wedding, retirement or travel.

Within your financial plan, you can choose to adopt one of two strategies: goal-based financial planning or cash flow-based financial planning. While both strategies can help you reach your financial goals, their approaches can be completely different. Knowing the differences between the two — and specifically how you can leverage cash flow-based financial planning in your own strategy — can help you achieve the results you want. It can be helpful to work with a CERTIFIED FINANCIAL PLANNER™ professional to help you determine which approach is better for your situation and life stage.

What is cash flow-based financial planning?

Cash flow-based planning zooms in on your cash inflow and outflow to help you understand your saving and spending patterns. This type of financial planning details your transactions and expenses as well as your income and assets. If you have a positive net cash flow, you have earned more than you spent. A negative net cash flow means that, in total, you spent more money than you made.

The benefit of cash flow-based financial planning lies in its detail. Your cash flow can tell your financial advisor where your money is coming from, where you are spending your money and where you can cut down on expenses. It can also tell you how much more money you need to save to hit your goals.

You can also include major future expenses into your financial plan. For instance, if you plan on taking out large sums of money for education or home improvement projects, you can incorporate that into your cash flow-based plan. Doing so can help you realize how much money you need to save in the near future. With all these pieces of information in place, you can more effectively and efficiently build your wealth over time.

In addition, your cash flow-based financial plan should account for current inflation rates, taxes, interest rates, insurance costs and more. As such, your plan can become your financial master plan, thoroughly detailing your life’s expenses. As a result, a cash flow-based approach to financial planning can help you meet specific goals, such as estate planning and retirement planning, while considering other goals, such as minimizing taxes to the best of your ability. Your CFP® professional may use computer programming to organize your budget and your goals, especially if they are dependent on one another. A program can also give you the ability to analyze the impact of a specific spending cost, like buying a house, and can help you see where your finances will be in the future if you continue to save, invest and modify your plan over time.

How does cash flow-based financial planning compare to goal-based planning?

While cash flow-based plans are extremely detailed and specific, goal-based plans are more generalized. They can help you achieve a straightforward goal — such as saving for retirement — without involving complex and interdependent goals. Individuals with a more complicated financial situation may benefit more from a cash flow-based plan rather than a goal-based one, as they need specific breakdowns to make complex financial decisions. Goal-based planning can, however, help you pinpoint what you want to financially achieve in your life and the practical next steps to meeting those goals. Goal-based planning is more focused on personal achievements rather than how well a portfolio or investment performs.

What are the phases of cash flow-based planning?

Cash flow-based planning involves focusing on your positive and negative cash flow patterns and acting accordingly. However, your plan should anticipate your changing career goals, lifestyle, age and estate plan to be successful.

Ideally, a successful cash flow-based plan follows three phases. These phases can help you compartmentalize the various details of your financial plan into larger categories. You can therefore achieve a bird’s-eye view of your finances as a result.

The three phases of the cash flow-based financial planning process include the following:

• Accumulation — The accumulation phase of the cash flow-based financial planning process involves collecting finances over a long period of time. You are in this phase if you recently began your career and have a goal of retiring down the road. In this phase, you are building your savings accounts and planning to have a comfortable income post-retirement. It can be helpful for you in terms of future planning to keep a record of your expenses and savings as they compare to your discretionary income.
  

• Preservation — After the accumulation phase, you are slowing down your career with a significant amount of assets, including savings, investments and funds. In this phase, you should place their money in stable, less risky areas; as retirement approaches, preserving money is of utmost importance. Preserving the money you dedicated your life to accumulating can help you ensure that you do not run out of money later in life. While both preserving and accumulating, you should keep a record of how your financial situation is changing. You should also try to plan for high inflation prices and high interest rates so that you are prepared.
  
• Distribution — During the distribution phase, you can finally draw from and depend on what you have accumulated and preserved over a long period of time. You can begin to take your income from your savings, investments and retirement accounts as previously planned. In a cash flow-based financial plan, you can plan to distribute your retirement to yourself and to your loved ones.

These general categories of a cash flow-based plan can help you better visualize your more detailed and thorough goals.

What are the bottom-line benefits of cash flow-based planning?

In a nutshell, cash flow-based planning allows you to financially plan for the long term while knowing that, like life, financial goals can change. It is important to have a dynamic financial plan that can adapt to unexpected events and setbacks. As a result, cash flow-based financial planning can be a great approach to realistic financial planning; it can take many life factors into account while giving you a big-picture perspective of your finances.

You can consult a CERTIFIED FINANCIAL PLANNER™ professional for guidance regarding your cash flows and how your income and savings are structured. You should work with a CFP® professional for your cash flow-based planning because they can:

• Secure your financial information
• Help you plan for retirement, including early retirement
• Guide you through the six steps of financial planning
• Help reduce your high-earning taxable income
• Help you organize your business and personal financial goals
• Advise you on investments
• Help you clarify and build your estate

Talk to a ProVise CFP® professional about cash flow-based financial planning

The three-phase cash flow-based planning process can help you establish and meet realistic financial goals. At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circ*mstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.

Are you ready to talk to a professional about your financial plan? Contact ProVise today to schedule a complimentary consultation.