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Why Cash Flow Matters to Your Wealth Plan

Your wealth planning—investment strategies, tax planning, wealth transfer, and more—begins with cash flow. Here's what you need to know.

A woman discusses cash flow and wealth planning with her advisor.

Any successful wealth plan begins with an understanding of cash flow—a detailed look at where your money comes from and where it’s going. That understanding will help guide your decisions as you work toward your financial goals, from investment strategies and tax planning to wealth transfer.

“Without an adequate understanding of cash flow, how do you know that your spending reflects your goals and objectives?” asks Cody Tresselt-Warren, a Senior Wealth Planner at Wells Fargo Private Bank.

Tresselt-Warren outlines ways that individuals and families can align cash flow with bigger-picture goals.

Plan for upcoming life changes and milestones

This is a smart place to start when working on mastering cash flow. For example, someone preparing to retire may be transitioning from receiving a regular paycheck to creating his or her paycheck from investments and other resources. Retirement can also mean a shift in expenses, such as traveling more or covering higher health care bills.

“Cash flow is at the root of much of the thought that goes into retirement planning,” Tresselt-Warren says. By working with your wealth advisor, you can design a portfolio around your needs for generating cash flow in retirement. That planning can also include understanding and minimizing the potential tax consequences of any changes.

Retirement isn’t the only life change that can impact cash flow. A child headed off to college may need financial support, or an aging parent may require assistance with everyday living. Understanding how much cash you’ll need for these changes is the first step to making the right decisions for your wealth plan.

Know how you’ll handle one-time expenses—or major recurring expenses

When people think about cash flow, they tend to focus on monthly living expenses, such as housing and health care. They often skip over so-called “one-time” expenses.

“Cash flow is at the root of much of the thought that goes into retirement planning.” —Cody Tresselt-Warren, a Senior Wealth Planner at Wells Fargo Private Bank

However, large expenses can happen regularly, Tresselt-Warren says. Some are actually recurring expenses, such as an insurance payment that comes along every six months or summer vacation costs. Others arise once every few years, such as replacing your car or the roof of your home.

“It’s beneficial to understand what those one-time expenses are and the potential impact they have on your cash flow every year,” Tresselt-Warren says. He suggests reviewing past spending to identify large expenses that you may encounter again so that you can plan for them.

Remember to compare the costs of using credit to paying cash

Sometimes, Tresselt-Warren says, it may make sense to borrow money or tap a line of credit to cover cash flow needs. Swings in the financial markets, for example, might make it more difficult to pull cash out of your investments. Short-term borrowing can bridge the gap.

“That can help with volatility in the market so that you’re not pulling funds from the market during inopportune times,” Tresselt-Warren says. “You can consider the borrowing costs versus the investment costs.”

Understand your feelings about cash flow

Like all wealth planning, managing cash flow isn’t just about the numbers. Your emotions drive your money decisions.

“Often we talk about the analytics of cash flow,” Tresselt-Warren says, “but we don’t really talk about the emotion.” He says people should ask themselves, “Am I using cash as a security blanket?” Some of us feel safer seeing a large deposit account balance or holding a large emergency fund, even if it’s unlikely we’ll ever face an emergency cost that sizeable.

“Or conversely, are you spending for enjoyment to the detriment of your goals and objectives?” he says. “Are there more efficient ways that could reduce anxiety regarding your cash reserves, or get to the root of why you’re spending at the level you’re spending?”

In the end, Tresselt-Warren says, your cash flow should fuel your hopes and aspirations. So working toward your goals begins with mastering your cash flow.

Mark Tosczak is an experienced business writer and marketing consultant based in North Carolina.

What can Wells Fargo do for you?

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Wells Fargo Wealth Planning Center, part of Wells Fargo Private Bank, provides wealth and wealth planning services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.

Wells Fargo & Company and its affiliates do not provide legal advice. Wells Fargo Advisors does not provide tax or legal advice. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. This product may not be suitable for all investors.


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