Hey Reader,

Everyone knows cash flow is the foundation of your financial plan. The problem is, most people have no idea what they spend and no one wants to fill out an Excel sheet with 50 spending categories.

So, I created a solution. Today, I'm sharing the exact process I use to create client cash flow plans. I'm sorry if you already saw this on X, but I couldn't let email subscribers miss it.

Step 1: Tax Returns and Pay Stubs

Pay stubs and tax returns contain so much useful data that I don't know how an advisor can provide useful advice without them. They're some of the first documents I collect from new clients.

I use the pay stub(s) to annualize employment income, savings, deductions, and tax withholding. You can use an online calculator.

For employees with equity comp, I build and update a vesting/exercise schedule throughout the year. Clients provide context on any bonuses they expect to receive.

Next, I review the prior year's tax return for other income sources, dividends/interest, itemized deductions, etc.

Then, I ask the client about any potential changes or one-off tax events. We also review self-directed savings to cash reserves, brokerage accounts, etc.

Using the annualized pay stubs, last year's tax return, and context from the client, I project the current year's tax liability.

​

We have a solid tax projection and accurate estimates of income, paycheck deductions, and savings. Now, we get into expenses.

Step 2: Itemizing Expenses

Instead of trying to categorize and add up every expense, we itemize liabilities and fixed expenses because they're easy to track down on a statement or online portal.

However, we don't lump these into living expenses. We separate them for tax and/or timing considerations.

Next, we look at goals and future planned expenses. These are segmented so clients can assign the value they WANT to spend on things like travel/experiences, family/charitable gifting, etc.

Real estate purchases, home remodels, weddings, etc., are modeled in the future.

Last, we account for substantial child-related expenses like daycare, pre-college tuition, etc. Once they end, we model the extra cash flow to be saved or spent. Instead of trying to itemize them, we assume minor expenses are absorbed into lifestyle spending.

Step 3: Viola

After subtracting taxes, savings, liabilities, fixed expenses, and other segmented expenses from income, we're left with a remainder.

We assume the remainder represents living expenses we expect to continue in perpetuity, like utilities, groceries, dining out, shopping, etc.

The individual categories that comprise your living expenses will fluctuate as you go through different life stages, but the total living expense number is more likely to stay consistent. For conservatism, unaccounted-for cash flow is assumed to be spent.

This exercise will help you estimate your living expenses without itemizing every expense you incur throughout the year. Remember, more advanced modeling must be done to account for changing variables and special circumstances like early retirement, college planning, etc.

Conclusion

As cumbersome as figuring out spending can be, it's crucial for creating useful planning recommendations. This process has been a huge time-saver for me and a huge stress reliever for clients. I hope you can apply it to create your own cash flow and savings plan!

Let me know what you think and have a great week!

-Matt Garasic

Disclaimer:

This is for general educational and illustration purposes only. This should not be taken as individual investment, tax, or legal advice.

Consult your legal, tax, and financial team before implementing any financial strategies for your specific circumstances.

P.S. If you want to...

• Spend less time worrying about taxes
• Enjoy more time with your family and doing things you love
• Have peace of mind that your family, wealth, and future are secure
• Feel confident you're maximizing opportunities and minimizing threats

Get a free, no-obligation analysis without the awkward sales pitch...

Still have questions? We have answers

• ​Services & Pricing​
• ​Prospective Client Process​
• ​Frequently Asked Questions​