By Team Tomorrow
Published September 15, 2020
Public companies are required to issue certain financial documents at regular intervals. On an annual basis, there is one document in particular that every investor should look out for: the cash flow statement.
This document allows shareholders to see how healthy the company is, and how well it has been managing their money. The company will also use these documents to craft new budgets for the next year.
The same strategy can be applied to your family finances. You want to stay on top of how healthy your money situation is and create realistic budgets as you consider diapers, college costs and extracurriculars this summer. Here’s how to plug your family’s numbers into a cash flow statement to evaluate your familial financial health.
Cash flow statements are typically issued once per year. Look at last year’s numbers as you plan your budget for the next twelve months. This is a great tool to help you establish New Year’s Resolutions, but they can be done at any time.
“Cash flow from operations” is a fancy way of talking about the money you brought in, and the cash you spent. Your family’s cash flow from operations may include:
You’ll want to make sure any income you record is after taxes to give an accurate view of your financial situation.
Unless you are in retirement, have a disabled dependent or have a child in college, your “cash flow from investing” section is likely to come up negative. But that’s a good thing; it means you’re using today’s money to invest in better tomorrows.
There will be two sections:
Have you collected money on a debt someone owes you? Or paid debt that you owe to someone else? If so, you’ll put it in the cash flow from financing section.
To get a better picture of what all this looks like when you’re done, we’re going to take a peek at the Jones family’s cash flow statement for the year. Joe Jones works part-time on the weekend and has an Etsy shop which occasionally sells some artwork, while his spouse, Sam, works full-time.
They have two daughters: Sarah started her freshman year of college in the fall, and Megan is a freshman in high school with Down’s Syndrome. The family uses an ABLE account to meet some of Megan’s expenses. They choose not to give their children an allowance.
With a final cash flow of -$4,372, the Jones family obviously needs to do better — even though they work hard to do the right things like maxing out their retirement accounts. The 0% interest intro offer on the credit card they’ve been using is going to expire in a couple months, and they don’t like being in debt to begin with. So they start evaluating their options.
Sarah’s 529 account won’t need anymore funding thanks to their diligent savings over the years. Her tuition and 529 withdrawals should continue to cancel each other out. While they could cut contributions to Megan’s ABLE account as they only used half of what they put in this year, it’s important to them to have money in the account into her adulthood—especially after they’re gone. So they decide to continue prioritizing it.
They talk with Sarah, and agree that she will pay for all of her ski trips and new clothes from here on out. They’re also going to cut back significantly on their habit of dining out, limiting the experience to once per month. While they’re not crossing the beach off the list forever, they decide to go on a more modest vacation closer to home in the next year.
A cash flow statement allows investors to get a big-picture idea of a company’s financial health. When you apply this same method to your family, you’ll illuminate blind spots you may have missed throughout the year, and you’ll be able to adjust your budget and spending accordingly.
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