Managing Personal Cash Flow

Dear Clients and Friends:

The topic of this blog entry might seem basic to many of you, but we do get questions from clients and prospective clients regarding how to begin accumulating wealth.  People can accumulate wealth in various ways.  Inheritance, growing a business, or saving and investment are classic ways for people to become affluent.  If there isn’t an inheritance on the horizon or you aren’t self-employed, you are left with saving and investing as your main wealth-building option.

To invest you first must save, and saving involves managing your cash flow.  Those who simply earn income and pay bills are merely surviving day to day, not managing cash flow.  The process of cash flow management involves understanding where money comes from and where it goes.

The five essential components of cash flow management include: 

  1.  Income: This is commonly derived from salary, bonus, hourly, self-employed, passive or investment sources.  In most cases, control over this component is limited.  However, there are some cases in which you may be able to control your income by working longer hours or a second job, taking on additional clients, or choosing investments that provide higher levels of income.
  2. Fixed Expenses: These are regularly occurring costs over which you have little monthly control.  Some examples include rent, mortgage, and utilities since they generally do not change in dollar amount.  Although you can move to a cheaper apartment or turn the thermostat down in the winter, these costs are locked in for the most part.  Structural changes have a greater influence on this category, which could mean moving to an area where property costs are less expensive or moving to a smaller home.
  3. Discretionary Expenses: Your budget is comprised of both fixed and discretionary expenses.  The latter is defined as costs that involve you making choices.  As a result, more control can be exerted in this category.  Although these costs can be somewhat subjective in nature, discretionary expenses are often viewed as “wants” rather than “needs.”  For example, you can shop at discount stores rather than premium name brand stores with higher price tags.  You can also choose whether to invest your vacation dollars on a trip to Europe or a less costly domestic trip.  This implies that the choices you make greatly impact the amount leaving your bank account.
  4. Taxes: This is the category that often makes us the most uncomfortable and, for most people, represents an automatic deduction.  If you either owed the government a substantial balance or received a significant refund, then you have some work to do on the tax portion of your cash flow management.  Tax management is an even more critical aspect if you are self-employed.  Contact us if you would like to set up a midyear appointment to discuss tax planning, which is a very important element of wealth management.
  5. Savings: Do you save regularly and systematically or do you save when there’s something left over?  Savings is the amount left over after you pay your fixed expenses, discretionary expenses and taxes, and is an important component of any cash management and wealth-building strategy.

By making better spending choices and, in most cases, by making sacrifices, people can arrange their affairs so they are cash flow positive.  All of this may sound overwhelming, but it is crucial to gain and maintain control over your money life.  There are even software and web-based programs available for budgeting, tracking, and analysis that can help improve cash flow.

We are all given choices in life.  If we make good choices and a few sacrifices along the way, we can create additional savings which will ultimately build wealth.  In the long run, the discomfort we might feel from making sacrifices will turn into great satisfaction.

We sincerely appreciate your continued business and hope that you find this week’s topic valuable.  If you would like to schedule an appointment to discuss tax or investment questions or issues, please contact Steve at 818.449.3122 or

Very Truly Yours,

Berkson Asset Management, Inc.
Registered Investment Advisor
Steven M. Berkson, CPA\PFS, CFP®, MBT

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