Cash Flows 101 

Cash flows are among the most basic components of personal financial planning. They are a great way to jump-start discussions with your clients about other financial planning issues. If you prepare individual income tax returns for your clients, you already have a good start on their cash flows.

Don’t call it “budgeting,” because many people freeze up at that word. A budget implies limitations, restrictions, and even value judgements. But cash flows are nothing more than income and expenses: what’s coming in and what’s going out. Hopefully, inflows are greater than outflows, but if not, then your clients really need your advice and counsel.

Cash inflows include taxable and non-taxable income, gifts received, government payments [e.g. Social Security], retirement income, and investment earnings. Cash outflows should include every conceivable daily living expenditure [see our comprehensive list at the end of this article], and don't forget about saving for an emergency fund, for long term goals, and for debt repayment.

Revisiting Cash Flows with Your Clients at Every Life Stage

Are you having regular “financial check-ups” with your clients ? If not, you should consider offering this service to your clients every few years, and especially before or during major life events [marriage, birth of children, divorce, sale of a business, retirement, etc.]

It’s a good idea to include your clients’ investment advisors, who know a lot about cash inflows and outflows in the accounts they manage. The investment advisors can also provide a balance sheet of the clients’ assets and liabilities, which go hand in hand with cash flows. It may even be appropriate to ask your clients’ attorneys to join the conversation, if prenups, divorce, estate planning, business structuring, or wills are likely to be discussed.

Although these financial check-ups should include updating the cash flow numbers, don’t forget about having general discussion of short-term and long-term investment goals, insurance coverage, estate and gift law changes, cybersecurity safety tips, credit reports and credit freezes, and tax planning ideas.

Cash Flows for Kids and Teens

Children and teens need to learn basic money skills: how to earn, how to save, how to spend wisely, and how to give to the less fortunate. There are many financial literacy programs and games for tweens and teens, including those sponsored by AICPA.

Parents are often unsure if they should give their kids an allowance, or how to instill positive financial values in their children. Generally, children develop a “money relationship” via family examples and explicit parental actions, so it has to start at home. But kids are also buffeted by peer pressure, marketing messages, and magical thinking [“I could win the lottery”]. So parents will be grateful to their CPAs for providing guidance in this area.

Cash Flows for the College Years

How will your clients and their children pay for college? The options include scholarships, grants, and fellowships; borrowing by the student and/or the parent; tapping savings accounts and 529 plans; gifts from family members; and part-time employment while in school. CPAs can run the numbers for their clients, or enlist the assistance of a specialized college financial counselor.

Remind your clients: when the kids turn 18, they need to set up a healthcare proxy naming the parents. Otherwise Health Insurance Portability and Accountability Act (HIPAA) rules will prevent the parents from being involved in any future healthcare decisions for their children, even if the parents are paying the college bills.

Cash Flow for Young Adults

Once they’ve entered the work force, getting a handle on income and expenses is essential for young adults. They should keep track of all expenses for a few months, especially since they may be paying for some items on their own for the first time.

Some young adults are feeling flush with their new-found earning power, and they’re spending it all. Others are not feeling so flush, because they are navigating student loan payoffs. Ideally, debt service should be less than one-third of income, but this isn’t always the case.

Young adults need to be reminded of the magic of compounding, and they should be encouraged to open a Roth IRA as soon as possible, or make the maximum 401k contribution at work. Parents can make up the difference in cash flows as a way of encouraging saving for the future.

Peer pressure, the vast cornucopia of consumer products, and easy access to credit cards are the money monsters for young adults. Your clients will be eternally grateful if you have a chat about cash flows with their young adults.

Recommended reading: ”Rich Dad Poor Dad” (Kiyosaki and Lechter) on financial literacy and related matters; “The Millionaire Next Door” (Stanley and Danko) on the importance of savings and investment.

Cash Flows and Family Life

Every couple needs to discuss and agree on roles for managing the household finances. Will they blend their financial accounts, or will each person keep separate accounts? Will there be a joint checking account for bill paying? If they are both employed, how will the finances shift once there are children? If one spouse no longer works outside the home, what will be the role and finances of that spouse?

During these prime earning years, family life will place many demands on the paychecks. Don’t neglect retirement savings, the employer match on 401k plans, and even Roth plans and conversions.

Blended families have especially complex cash flow issues—who pays for everyday expenses; who claims the children as dependents; who is responsible for college costs.

Life insurance, wills, and healthcare proxies need to be reviewed and updated as family circumstances change.

Cash Flows and Prenups

Do your clients need a prenuptial agreement? Some high-net-worth families “require” them, while other families like to boast about them. Prenups are essential for second marriages, when both parties may be bringing assets, debts, or children to the marriage.

At a minimum, every couple should discuss finances before marriage: are you a saver or a spender? How much are you earning? What are your regular expenses and occasional splurges? Any student loans or other debts?

When your clients’ children get engaged, this would be a good occasion for you, the CPA, to meet with the young couple to discuss finances, taxes, and the like. The parents will be grateful, and it will help ensure that you retain the new couple as your clients.

Recommend reading: https://www.securian.com/insights-tools/articles/pre-marital-checklist.html

Cash Flows for Divorce

CPAs do crucial work with attorneys and the courts during divorces. CPAs are often called upon to do an inventory of the couples’ assets and debts; the 1040 is always a good starting point.

Each party will need to revisit his or her income and expenses. Post-divorce cash flows can be especially challenging for women: income can fall by 40% or more.

There are cash flow and tax implications on the sale of the family’s personal residence; the CPA is uniquely qualified to assist. Consider how retirement assets will be split, and if one spouse can collect on the other spouse’s Social Security earnings record. (This is possible if the couple was married at least 10 years.) Both parties should revisit their wills, IRA beneficiary forms, life insurance coverage, and health insurance.

Last but not least—which partner will stay your client? You may need to choose, or the couple may make the decision.

Cash Flows for Retirement

One of the most common questions that clients ask their CPAs is, “Can I afford to retire?” A fresh look at cash flows is crucial, because other income sources will have to serve as wage replacement, and because expenses may shift dramatically.

For some clients, working for a few more years can help maximize savings and Social Security payouts. Individuals should check their SS statement online every few years because they’re no longer being mailed to most taxpayers. The most common income sources will be SS; retirement accounts including

401(k)s, IRAs, pensions, personal savings and investments. This is the time to shift investments from growth to income.

Expenses will fluctuate in the first few years of retirement, as many clients spend more on travel, entertainment, and gifts to family members. Healthcare costs may balloon because individuals are no longer covered by employer plans. Medicare supplemental insurance and long-term care insurance are important to consider.

Ideally, mortgage or personal debts will be paid off by retirement; if not, these will be an ongoing expense.

Cash Flows for the Third Age

Mae West said it well: “Getting old isn’t for the faint of heart.”

The golden years can be costly: homecare costs, healthcare costs and administration, Medicare supplemental insurance, and prescription drug costs add up quickly. If long-term care insurance was purchased in the past, it can ease some of the burden.

Talk to your clients about a healthcare proxy and power of attorney—get these on file sooner rather than later. A joint checking account with an adult child can help with financial administration.

Cash Flows for Widowhood

After the death of one spouse, the household’s finances will be in flux. Bank accounts may be frozen, while there will be urgent bills to pay. Some sources of income (e.g., pensions) may cease at the death of the original payee. SS benefit payments may change. If the decedent’s will calls for a credit shelter trust, that will provide income flows once the trust is funded.

On the expenses side, the daily living expenses of the survivor may not decrease much, if at all. Housing costs will likely be the same. If the deceased spouse was managing the household and/or caring for the other spouse, there will be additional expenses to replace those services; thus, revisiting cash flows for the surviving spouse will be an important task for the CPA to address.

Other issues to consider are inherited IRA payouts; step up in basis on half of co-owned assets; and sale of the personal residence within the two-year window. Working with the attorneys, the surviving spouse will need to update her legal documents, including potentially the will, healthcare proxy, trusts, power of attorney, and joint accounts.

Expense Categories

Here is a comprehensive list of expenses to consider when working with your clients on their cash flows.

• Rent [or mortgage, taxes, and upkeep] — ideally less than 30% of gross income
• Utilities [heat, electricity, water]
• Phone / data plan
• Local transportation / car expenses
• Travel
• Groceries for eating at home
• Eating out
• Insurance [life, property, health, auto, umbrella]
• Debt payments for student and personal loans, and payoff of credit card debt
• Entertainment [at home and out]
• Books, magazines, newspapers
• Clothing, shoes
• Personal care / medical expenses
• Gym / fitness equipment
• Savings [emergency fund of six months’ spending]
• Charity
• Gifts to family members
• Taxes

Conclusion

When it comes to cash flows, CPAs can offer a wealth of experience and expertise in guiding their clients. All CPAs should add cash flows to their personal financial planning toolkit. And regular financial checkups can help improve the clients’ financial well-being and strengthen the client-CPA relationship.

Jill A. Harris, CPA, MBA, has spent her career advising individuals, families, and family-owned businesses on personal financial management and tax planning matters. She served as a tax director in the New York City office of CohnReznick LLP. She was also VP of a NYC-based family office and private foundation serving 80 individuals spanning four generations. She is an active community volunteer in New Jersey and NYC, serving on many professional and nonprofit boards. A native of Los Angeles, she has a BA from UC Santa Barbara and an MBA from Columbia University.