retirement

Wealthy People Need Budgets Too: It's Called Cash Flow Management

The power of understanding your spending is priceless. Successfully managing your spending and personal cash flow is key to meeting your short- and long-term financial goals.

In our experience, ultra-high-net-worth individuals underestimate their spending by 25% on average — and sometimes by as much as 50%.

It can be very easy to misjudge your spending when your financial picture is complex. You may not feel that you are necessarily spending beyond your means, and you may not be. In reality, your finances are simply not optimized.

Being organized can help relieve feelings of uncertainly around your cash flow and can give you confidence that you’re using financial resources as effectively as possible.

It’s critical to be engaged with your cash flow management process, but simply earning income and paying bills isn’t enough to be truly involved. Real cash flow management involves forecasting anticipated expenses and then tracking them against that forecast. It also includes timing expenditures and anticipated inflows to eliminate unnecessary/untimely sales or liquidity crises.

Know Your Numbers

Do you know where every penny of your money is going? How much cash do you need to have readily available for both planned and unplanned expenditures? Are your lifestyle choices affecting your ability to reach long-term goals?

The complexity that comes with wealth, such as owning multiple homes and cars, can make it easy to overlook unnecessary expenses. From high heating or cooling bills at infrequently used properties to unused subscription packages to club memberships and even decorating costs — all these costs can go unrecognized, but they certainly add up. Regardless of your net worth, understanding your cash flow is key to successful wealth management.

Accurate cash flow data can help you make constructive, better-informed financial decisions that align with your values and goals. By optimizing your liquidity and cash flow, you can avoid the anxiety that may come along with unexpected expenses, while maintaining the confidence to stick with your established long-term plan.

Working with a firm that provides the following technology tools can help you really understand what you’re spending and make good decisions:

  • Digital bill payment services through an open-architecture bill payment system that operates across multiple banks
  • Aggregation of all cash (and investment accounts)
  • Annual cash forecasting to set an overall personal spending target, as well as target spending in your key lifestyle areas (i.e., primary home, beach home)
  • Detailed reporting that incorporates all cash accounts and credit cards and is organized to highlight spend vs. target, one-time vs. recurring, large vs. small, and self vs. family vs. community

Know Your Strategy

Now that you have a handle on what you’re spending and where the money is going, use that information to consider the big picture. Look at your cash flow strategy’s structure: Break it down into how you spend on yourself, then your family and finally, your community. This structure can help dissolve any uncertainty about your personal goals.

By focusing first on yourself, you will quickly see how much of your wealth is going into supporting your current lifestyle, whether it’s too much or too little, and what opportunity exists to maintain or improve your lifestyle.

For example, take a soon-to-retire father who wanted peace of mind that his financial targets still made sense given his reduced income. By digging into and examining his cash flow data, he was reassured that he and his wife would not run short of funds when he retires.

He had been spending to maintain his lifestyle and actually had set aside an excess of $6 million. He realized he had the ability to accomplish two important goals on his bucket list: Buy the vacation home he and his wife had dreamed of for years; and set up a fully funded education trust to cover all expected college costs for his six grandchildren. Accurate knowledge of his current and projected expenses reassured him about his financial picture, and gave him the confidence to pursue additional goals to support his family.

By evaluating your cash flow and its impact on your ability to meet your long-term goals, you can better determine what’s essential, and what’s luxury. Arming yourself with this full understanding will help you see how your spending fits into the bigger picture.

After solving for your own cash flow needs and identifying available excess cash, you can then focus on your family and the impact you want to make on your community. Do you want to put more away for your children and grandchildren? Are you passionate about giving to a particular nonprofit? The knowledge you’ve gained around your spending will better enable you to further build out your strategy for your family and community.

Know Your Progress

Cash flow management isn’t a one-and-done tactic. It’s an ongoing commitment to ensure your spending doesn’t affect your ability to meet your financial goals. Do you have access to those technology tools that provide customized insight into your income and expenses? The ability to view trends in your spending and real-time data can illustrate how your income relative to your spending may be impacting your investment strategy, or how it is holding you back from making more impactful and beneficial long-term decisions.

An honest assessment of your spending can help drive your success in planning for your financial future. Building a sound strategy, interacting with your wealth, and tracking progress against your financial goals can help you become a more effective and confident decision-maker in managing your wealth.

The above example is a fictional representation and is not meant to guarantee that a client’s needs or objectives will be met.

About the Author

Michael S. Farrell

Managing Director, SEI Private Wealth Management

Michael S. Farrell is Managing Director for SEI Private Wealth Management, a business unit of SEI that provides private wealth management solutions, serving high-net-worth individuals and families.

Most Popular

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!
estate planning

How to Use Your Estate Plan to Save on Taxes While You’re Still Alive!

Upstream basis planning is a trust strategy that can save wealthy people on their capital gains taxes and income taxes associated with highly apprecia…
July 3, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
The 15 Best Growth Stocks for the Rest of 2022
growth stocks

The 15 Best Growth Stocks for the Rest of 2022

A sharp selloff in growth stocks this year creates opportunity for keen investors. Here are 15 top-rated picks to consider in the second half of 2022.
June 28, 2022

Recommended

How 13 Types of Retirement Income Get Taxed
retirement

How 13 Types of Retirement Income Get Taxed

When you're planning for retirement, it's fun to contemplate all the travel and rounds of golf ahead of you, but don't forget about taxes.
June 30, 2022
In What Order Should You Tap Your Retirement Funds?
retirement planning

In What Order Should You Tap Your Retirement Funds?

Should you go with your IRA first or your brokerage account? Pulling money haphazardly can have negative implications. Instead follow this road map fo…
June 28, 2022
An Easy Way to Find How Much You Will Spend in Retirement
retirement planning

An Easy Way to Find How Much You Will Spend in Retirement

One simple math equation can help you determine where to start building your retirement income plan, and whether your money should last.
June 27, 2022
Retirement Comfort: How to Avoid Running Out of Money
retirement planning

Retirement Comfort: How to Avoid Running Out of Money

When it comes to retirement planning, one thing all of us worry about is whether we will have enough money to last. Financial professionals can help y…
June 25, 2022