Welcome back to our one year financial planning journey with Nick and Peter.
This month’s meeting was all about understanding their current cash flow and financial habits. Not only had Peter and Nick identified they needed some help with managing their cash flow, understanding a client’s relationship with money and how that affects their cash flow is key to planning for other aspects of a client’s financial life.
CASH FLOW MEETING #1
One of the first and most important topics we explored was how Nick and Peter manage their day-to-day finances. During the discussion, we learned that Peter is the more active partner when it comes to handling their financial affairs. He ensures that bills are paid on time, and their joint savings strategy is in motion. Nick and Peter both use credit cards for all of their lifestyle spending and Peter makes sure they are paid in full each month to avoid any interest charges. Aside from ensuring there is enough money in the joint bank account for bill payments and that the credit cards are paid off, they haven’t been tracking what their money is being spent on.
We also discussed:
Current cash flow - monthly take home salaries, existing saving strategies and average spending.
Lumpy income - Peter receives a bonus which is paid annually each February. Nick receives a bonus that is paid about 6 weeks following the end of each quarter. Each of their bonuses have been fairly consistent over the past few years.
Short-term goals and expenses - they have ordered e-bikes which are to be delivered (and paid for) next spring. They have not yet started saving for this purchase.
Current cash flow
We discussed in our meeting how easy it is to “tap” away with credit cards and not have a clear idea how much has actually been spent on lifestyle in a given month. This lack of clarity has proven to be an issue for months of larger expenses and purchases such as their annual car and home insurance premiums and this year’s vacation. This has led them to dip into their home equity line of credit (HELOC) to cover these months then try to remember to cut some of their lifestyle spending the following month to account for repaying the HELOC. This is a cycle that has been playing out for some time now.
Variable income
Peter explains over the past few years they have been using Nick’s quarterly bonuses to pay back the credit card or HELOC when they have overspent. His annual bonus usually goes to an RRSP contribution in February. He admits that he does usually see an income tax refund in May but this is usually spent on repaying the HELOC too.
Short-term goals and expenses
Nick and Peter have not put much thought into how they would pay for the e-bikes and they admit they haven’t been able to save for more than a couple of months when they have tried to save towards larger purchases and expenses in the past. They find they need most of their income to pay off the credit cards each month.
Summary
Nick and Peter's lack of insight into their spending habits has allowed them the freedom of unchecked spending but has also instilled anxiety about their financial trajectory. While they've maintained commendable habits like paying off credit cards and contributing to RRSPs, they've grappled with prioritizing immediate gratification over long-term financial goals.
We concluded that Peter and Nick need a comprehensive cash flow plan. This plan should include provisions for fixed expenses, establish a monthly target for lifestyle spending, and account for variable income and expenses. Equally important is the challenge of finding a way for them to stick to this monthly target. This will help them feel more in control of their cash flow and avoid the reliance on debt.
NEXT STEPS
For their next assignment, Nick and Peter are tasked with a detailed review of their past 6-12 months of credit card and bank transactions. Categorizing expenses such as groceries, dining out, and household purchases, they will input this data into our cash flow tracking software, Winton, for us to review and analyze.
In next month's meeting, we will examine Nick and Peter's spending patterns and delve into the emotional aspects of their spending and distinguish them from those driven purely by habit. This understanding is an important step in crafting a cash flow plan that is effective and sustainable. We will also look at smoothing out monthly cash flow by looking at other ways to accommodate for their larger expenses.