Personal Finance Cash Flow Bill Klinger

Personal Finance Review Opportunity costs

Cash Flow It is all about cash flow Cash inflows Cash outflows In business Personal Cash inflows Salary/wages Gifts Investments Cash outflows Living expenses Debt interest and repayment

Cash Flow Statement Shows cash flow over a period of time E.g. monthly, annually Start with disposable income Income after tax Can show actuals Statement of what happened Shows how much you saved Can show forecast A budget Shows how much you may save

Cash Flow Statement (~Income Statement) Cash Inflows Disposable (after-tax) income Gifts Investment income . Total Cash Inflow Cash Outflows (expenses) Rent Electricity Water Gas Food Eating Out etc. . Total Cash Outflow . Net Cash Flow .

Cash Flow Statement Pay attention to Recurring monthly expenses Rent Cable Phone Loans Annual expenses Insurance Memberships These can eat up much of your disposable income

Cash Flow Statement Net cash flow is savings Savings rate = savings / income National average ~5% Set a savings target

Saving The most important financial decision you will make

You Can Never Catch Up Person A: Saves $2000 per year from age 22 to age 35 and then stops Person B: Starts saving $2000 per year beginning at age 35 and never stops Both earn 8% on their investments. At age 75: Person A has $1M in savings Person B has $561K in savings

Years to “Financial Freedom” Savings Rate Years to “Freedom” Age when “Free” 5% 50 72 10% 40 62 15% 34 56 20% 30 52 25% 26 48 Assumes: - 7% annual rate of return. - Start saving at age 22. Source: http://www.forbes.com/sites/robertberger/2015/03/03/ how-much-of-your-income-should-you-save/2/?ss=retirement

Your Finances Save aggressively Establish a savings level (at least 15%, think 20+%) “Pay yourself first” Take pride in your savings, not your stuff Plan to save a little each month for future major items, e.g. a car Avoid debt, except for a mortgage always pay off credit card balances if can not pay off balance, do not buy Keep track of your expenses Don’t spend like a millionaire until you are one.

Factors Affecting Cash Flow Inflows Type of job Stage in career Income earners in household Outflows Family size Age Health Personal consumption

Budgets Textbook budgeting “Pay yourself first” budget Create a cash flow plan (budget) Track actuals to the budget Good method but rarely used for long “Pay yourself first” budget First, set aside the amount you plan to save long-term Put where you can’t touch it IRA, Roth IRA, 401(k) Second, set aside amount for mid-term Last, spend what is left however you want

In Class In groups of two Create an outline for a cash flow statement How do your individual life differences affect the statement?