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’ve found that most people cringe at the idea of budgeting. Everyone assumes that it translates into restrictions, and who wants to be restricted in their lifestyle?

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As a result, I’ve found that many clients lack a monthly budget, including those who have more than sufficient income to cover their needs.

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I understand why clients hate the budgeting exercise when it comes to financial planning. I imagine it’s like when my fitness and nutrition coach reminds me of my 10-pound weight-loss goal and the need to start tracking my food macros daily. “I’ll get right on that,” said no one ever.

As a result, I’ve changed my approach with clients to instead focus on “cash-flow planning.” But what does that mean and why is it so important in all stages of life?

Cash-flow planning can feel like an insurmountable task when you’re early in your career, especially during recent inflationary times. Salaries are entry level with minimal annual increases, while housing costs — renting or owning — are at or near all-time highs. Throw in inflated food prices, student debt and/or taxes, and the list of costs can seem endless.

There can be very little left after monthly needs to cover discretionary spending, much less for a savings and investment strategy. But I like to remind clients that squeaking out even $100 per paycheque towards investments creates a healthy habit that can be built upon over time.

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Eventually, things start to feel a bit better as you progress in your career or with your business, along with an income that follows suit. It becomes a balancing act between how much you should pay towards your liabilities and how much you should contribute towards long-term investments. Which goals should take priority: an emergency fund, saving for a down payment, children’s education or retirement?

Many clients are hyper-aware of their debt and want to quickly pay it off at the expense of building up investment assets. However, various tax-savings opportunities (first-home savings account, registered retirement savings plan or a tax-free savings account) and government grants (for a registered education savings plan and registered disability savings plan) can make savings lucrative, particularly early on when time and the effects of compounding returns are on your side.

This is where cash-flow planning is effective. Once you know how much cash flow you have after paying the necessities, an adviser can help you determine how best to allocate that excess cash flow between both liabilities and savings. The best plan will be different for everyone and must evolve for each person’s and/or family’s changing situation, so it is imperative to have a professional regularly guide you through the options.

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

Every client’s nightmare is for the markets to suddenly drop when they retire. Therefore, it’s important to estimate what your investments need to generate each year in retirement, in addition to your various government and private pensions, and structure your investments accordingly in conjunction with your risk tolerance.

The retirement transition phase is always a little worrying for clients, regardless of their net worth. You go from having one paycheque where your employer takes off enough taxes for you during your working years to having three to six different payments (Canada Pension Plan, Old Age Security, private pensions, investments and registered account payments), and it is your responsibility to determine how much tax to withhold.

In later retirement years, there could be increased costs for personal care workers and/or retirement homes that will affect your finances as well. An experienced financial planner can help you plan for all these considerations and simplify what can be a long and complex transition.

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The final phase of wealth is one of legacy and transfer. Once all your goals and long-term needs are sufficiently provided for, how do you want to transfer the remaining wealth, whether to family and/or charitable giving? Will that wealth pass on during your lifetime or in your estate? Will it be over a period of years or all at once?

Cash-flow planning will also help us estimate taxable income during your lifetime and in death, allowing us to offer advice on how to make the most of the wealth transfers on a tax-efficient basis, thereby extending the value of those gifts.

By now, it should be clear that cash-flow planning (ahem, budgeting) is integral to helping you reach your goals and maximize your wealth at various times in your life. Now, if you’ll excuse me, I’m going to work on that dreaded food tracking I’ve been procrastinating on.

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

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