Cash Flow: It’s Not Just for Accountants

The More You Know About Cash Flow the More Empowered You Become

What is Cash Flow?

Anyone who lives within their means suffers from a lack of imagination.” – Oscar Wilde


Oscar Wilde may very well be the best exemplar of what to avoid in terms of personal finance. In a nutshell, cash flow measures the movement of money into and out of your household’s financial accounts. Income is the positive side of cash flow, while expenses represent the negative side of cash flow.


You Can’t Get to Net Worth Without Cash Flow

In a previous post I wrote about Net Worth, adding up all you own and subtracting all you owe. Well, you can’t get to net worth if you don’t have cash flow.


There will always be a few people for whom cash flow comes in a huge lump, in the form of a lottery win or an inheritance, for example. For most of us, though, our net worth is built up by diligent saving, that is, by living within our means, with cash inflows exceeding cash outflows.


Not Everything that Counts can be Counted; Not Everything that can be Counted Counts” – William Bruce Cameron

I like this saying. It is a reminder that life cannot be reduced to numbers. Financial planning necessarily includes an evaluation of your financial numbers, but these numbers are not an end in themselves. Nevertheless, in the case of cash flow, attention to the numbers can make a huge difference because positive cash flow supports everything else you seek to accomplish.


For most households, cash inflows are easy to determine. Examples include:

  • Salary or wages
  • Interest or dividends
  • Government benefits
    • GST/HST Credit
    • Canada Child Benefit


Cash outflows, expenses, though, require some attention to detail. Look at your pay advice from your employer. For example:

  • Income tax
  • Canada or Quebec Pension Plan
  • Employment Insurance


You may also have additional benefits from your employer toward which you also contribute, resulting in more deductions or expenses:

  • Company pension plan or group RRSP
  • Group insurance
    • Life
    • Disability
    • Supplemental Health and Dental


And then there are the expenses that are virtually a mandatory part of home life:

  • Rent or mortgage
  • Utilities
  • Automobile – fuel, insurance, maintenance
  • House or tenant insurance
  • Property tax if you own your home
  • Home maintenance, renovations, replacement of large appliances


There are also expenses that are more flexible, over which you have a greater degree of control:

  • Clothing
  • Vacations
  • Entertainment


After all those expenses, there is still a desire to save for the future, which is also a kind of expense:

  • RRSPs
  • TFSAs
  • Non-registered investments
  • RESPs to save for your children’s post-secondary education


Finally, many people wish to have enough to share beyond themselves:

  • Gifts
  • Charity


Tracking expenses sounds complex, but the remedy when your cash flow is inadequate boils down to two choices:

  • Reduce your expenses
  • Increase your income


Reducing expenses may involve some diligent tracking, ideally over the course of a year because some expenses are infrequent or irregular. On the other hand, increasing your income may seem relatively simple: get a higher-paying job. However, that is not necessarily easily done if it means moving, working longer hours or otherwise disrupting a lifestyle that, aside from income, provides a degree of comfort you’d rather not give up.


Having said that, even higher income households can have cash flow issues if they spend more than they bring in. Consequently, control is required regardless of income.


Automate It!

Control is not easy if willpower is the only tool you have at your disposal. Fortunately, that is not the case. Behavioural economist Richard Thaler observed that, unlike the standard economic models which assumed that human beings are rational and act in their own interest, humans act irrationally all the time. The case that is often cited is the employee-sponsored retirement plan. Even when employers provided an incentive for their employees to save by matching employee contributions, many would still decline to contribute to the plan if they had to do so on a voluntary opt-in basis. Instead, Thaler recommended that employees automatically be enrolled. The result was that employees effectively increased their income because they received the benefit of the employer match.


You can automate your cash flow, too. If you own a home, your mortgage is probably already automatically deducted from your bank account, but you can also arrange for many of your other expenses to be automatically deducted: utilities, property tax, contributions to RRSPs, TFSAs, RESPs and other savings or investment accounts, donations to charities, and credit cards. You can set up multiple savings accounts and arrange for a portion of your paycheque to automatically go into your vacation account, and another portion to go into your emergency fund account, to name just two possibilities.


Managing cash flow will take you a long way toward managing other elements of your financial life. More to come in a future blog.


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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, accounting or legal decisions.