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Cash Flow Planning Basics

The idea behind cash flow planning is to match expenses on life goals with the available income. Cash flow planning begins with identifying the sources and the amount of income and expenditure.

'Income' includes maturities of investments, income from other sources, dividends, etc. 'Expenses' include loan repayments, and all other outflows etc.

The next crucial step is to list out the life goals and assigning a time frame for achieving them. For example, your list could look like this:
  • Going abroad on a vacation next year
  • Buying a car in 2 years
  • Buying your child a computer next year
The next step is to prioritise these goals. As you will notice, some of these goals (like buying your child a computer, which is important for his or her education; or a wedding in the family) are high priority, while others (such as going abroad on a vacation) could be assigned a relatively lower priority.

High priority goals are those where you do not have the liberty of compromising either on the time frame or on the amount. Low priority goals, on the other hand, can be tweaked around a bit.

Finally, take care to ensure that you have a contingency fund to tackle an emergency. Ideally, the size of your contingency fund should be two-three times your monthly expenditure, if you are a working person. If you are a retired person, the amount should be three to five times.

Thereafter, your financial planner can help you work out the right investment strategy by using the principles of Investment Planning. Essentially, this involves calculating the amount of investment required to realise the goal, taking inflation into account.

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