FINA PLAN

Financial Advice

a communication that, based on its content, content and presentation, would be reasonably viewed as a recommendation that the Client take or refrain from taking a particular course of action with respect to:

• The development or implementation of a financial Plan

Financial Planning

a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial advice that integrates relevant elements of the Client’s personal and financial circumstances

Is the process of

• Formulating

• Implementing

• Monitoring financial decisions into an integrated plan

7 Steps: The Financial Planning Process

1. Understanding the Client’s personal and Financial circumstances UBER

2. Identifying and selecting goals IS

3. Analyzing the Client’s current course of action and potential alternative courses of action A

4. Developing the Financial Planning Recommendations DRUNK

5. Presenting the Financial Planning Recommendation PERSON’s

6. Implementing the Financial Planning Recommendations IMMEDIATE

7. Monitoring Progress and Updating MONTOR VEHICLE

How does a planner effectively communicate with a client

• Address the client formally (at least initially)

• Actively listen to the client

• Respect the client’s time

• Show empathy

Contents of the Financial Plan

considers the client’s financial goals and values (internal data) and external environment (external data)

Internal Data (Quantitative & Qualitative)

• An evaluation of the client’s risk management portfolio

• F/s preparation and analysis

• Long term goal planning

• income tax planning

External Data (that influence the plan)

• Economic factors: GDP, interest rates

• Social factors

• Political factors

Step 1: Gathering Client Data

The internal data collection process

• Quantitative Data

  • Family

  • Insurance portfolio

  • Current statements

  • Taxes

  • Retirement & Employee benefits

• Qualitative Data

  • Goals: Education, retirement, employment, savings

  • Risk tolerance

  • General attitude toward spending

Step 2: Identifying and Selecting Goals

Part 1: Defining Goals

• SMART

  • S: Specific

  • M: Measurable

  • A: Achievable

  • R: Relevant

  • T: Time-bound

• Part 2: Prioritizing Goals.

  • Can’t tackle everything, what is the highest priority?

  • Helping a client recognize highest priority communication techniques

The Benefits from Financial Planning

• The financial planning process helps identify risks and establish and prioritize goals

• A financial plan anticipates where financial needs exist and where new risk may arise

• A financial plan establishes benchmarks within a finite time frame

• A financial plan can help keep the client focused

• A financial plan can give a client confidence that they can accomplish their financial goals

Fiduciary

A person of trust and confidence who is required to act in the best interest of another person of another person.

The Business of Financial Planning

• Financial Planning

• Insurance product sales or advice

• Investment product sales or advice

• Tax Preparation or advice

• Debt management and budgeting

• Real estate management or advice

• Combinations of the above (and others)

Planners may fall under the jurisdiction of multipler regulatory agencies and be required to obtain and maintain multiple licenses

3 general schools of counseling

1. Developmental: in stages over time

2. Humanistic: congruence and acceptance of personal responsibility

3. Congnitve-behavioral: reinforcers are maintaining

Developmental

• Early relationships form the template for establishing relationships later in life

• Disruptions (trauma, incident) will result in predictable problems,

Takeaway: if you can help a client resolve earlier conflicts or disruption, there is more self-awareness, thus allowing the client to grow

Humanistic

• For a client to grow, relationship requires transparency

Takeaway: If you can help a client discover what goals will help the client achieve congruence, allow for self-growth, and identify some of the client’s feelings about money and tendencies to cognitive biases, the client will thrive.

Cognitive Behavioral

• All behavior is subject to the principles of reinforcement by environmental conditions that reinforce or fail to reinforce a given behavior

• Advisor must identify behavioral excesses and inadequacies, identify their reinforcement and try to manipulate these reinforcers to change the client’s behavior and thought process

Takeaway: If you can help a client see specific areas where they have been successful, thus reinforcing the positive results, it will reinforce the client’s believe in process of planning and trust in the advisor

Communication

is key

• Active, passive and reflective listening

• Body language

• Voice communication

• Motivational interviewing

• Question master -open-ended or closed-end

• Learning styles

Note: when communicating with the client, a combination of words, numbers and graphics should be employed

Passive Listening

• Normal or usual conversational setting

• Communication rests entirely on the other person

• Effectiveness is subject to many obstacles: distractions, interruptions, daydreaming, phones, etc,

Active Listening

• Undivided attention

• Quiet internal dialogue, not thinking about what to ask next

• Utilizing nonverbal and verbal cues - nodding head, responding yes, go on, I understand

• Use restatement, paraphrasing, summarizing, open ended questions and questions that show interest

Reflective Listening

• Similar to active listening

• Listening to understand the message the speaker is conveying, demonstrates EMPATHY

• Repeating the perceived message back to speaker to get their confirmation of their message, feelings and next steps

Nonverbal behavior& & body language

• can communicate feelings and attitudes from the client to the financial advisor

• are mainly provided from the body and the voice

• Body position and body movement are important while voice tone and voice pitch are also telling

Voice Communication

• Tone and pitch can be at odds with what is being said— utilize listening skills and nonverbal cues to really understand what the client is communicating

• Same is true for the advisor in communicating with the client

Types of Questions

Open-Ended Question

• One that will result in a person answering with a lengthy response

  • What does money mean to you?

Closed-Ended Question

• Seeks a response that is very specific and commonly. involves an answer that can be accomplished with a single word or two

  • Ex. Do you currently have a balance on your mortgage

Motivational Interviewing

conveys empathy and acceptance

• Partnership: collaborative process

• Evocation: draw out client’s priorities, values and wisdom

• Acceptance: nonjudgmental, seeks to understand, respect client’s decision to make informed choices

• Compassion: promotes and prioritizes client’s welfare and wellbeing in a selfless manner

Learning Styles

• Visual

  • 65% of people are primary visual learners

  • Using graphics, charts, drawing

• Auditory

  • 20-30% of people are primary auditory learners

  • Prefer listening and speaking

• Kinesthetic

  • 5-15% of people are primary kinesthetic learners

  • Learn through movement and touch- likely good in-person clients

Additional communication notes

• Attitudes

  • Not every client will be as excited as the planner

  • You should manage client expectations from the beginning

• Values

  • Some clients carry certain values that must be tailored to

  • Religious practices or beliefs may mean certain investments are off limits (ex. Shariah Law)

  • Social conscious or ESG investors

• Behavioral characteristics

  • everyone is different

  • some clients are talkers and some are very to the point

Client Data Collection

• More than reviewing bank statements and balance sheet

• Advisor needs to learn about”:

  • Who the client is and understand the client’s personal and financial goals, needs, and priorities

  • Dynamics of family/family memebers

  • What else would be relevant for me to know about you? OR “Is there anything else that would be relevant for me to know about you”.

Developing a trusting relationship with a client

• Joining

  • making a connection with the client and establishing a trusting relationship

• Communication Skills

  • Reflective listening

  • mirroring

  • open-ended questions

• Unconditional positive regard

• Integrity

Traditional Finance (MPT)

Four basic Premises

• Investors are rational

  • investor preferred more wealth compared to less wealth

• Markets are efficient

  • No mispricings in an efficient market — cannot outperform the market

• The mean-variance portfolio theory governs

  • investors choose portfolios by viewing and evaluating averages and variance

• Returns are determined by risk (beta)

  • Focus is on asset risk in relation to the benchmark

Also referred to as modern portfolio theory

Behavioral

• Does not fully reject Traditional Finance’s views or methods

• Assumptions

  • Investors are normal

    • May commit cognitive errors driven by biases or otherwise

  • Markets are not efficient

    • There can be deviations in price from fundamental value so that there are opportunities to buy/sell at a discount/premium

  • The behavioral portfolio theory (BPT) governs

    • Choose portfolios by evaluation and decisions based on expected wealth, desire for security, and aspiration levels- see pyramid

  • Risk alone does not determine returns

Risk/Return Relationship

• High Risk

  • Want: I want to live in Sicily for 3 months

• Medium-High Risk

  • I want my spouse to be able to retire, but I will work through normal retirement age

• Medium-Low risk

  • I want my children to have a college education

• Low Risk

  • I want food on the table and a roof over my head

Anchoring

• Attaching, or anchoring, one’s thoughts to a reference point even though there may be no logical relevance or is not pertinent to the issue in question

Ex. Purchase Price Trap

Confirmation Bias

• Filtering information and focusing only on info that supports their opinions

• Example: selective search on renewable energy company

Familiarity Bias

• Leads decision maker to what they are most familiar with vs. assessing alternatives

• Ex. buying the stock of your favorite coffee brand

Recency Bias

• Giving too much importance to recent market events and forget long-term history

• Ex: Midterm elections and market performance

Herding

• Copying what everyone is doing vs doing your own research

• Ex. FOMO for SpaceX

Hindsight Bias

• False belief that you predicted a market event or stock movement before it actually happened

• Ex. Buying amazon before they became no longer just a book retailer and saying you knew they were going to be more than that.

Overconfidence Bias

• Only listening to yourself and overestimating knowledge, skill and ability to predict market movements

• Ex. investing life savings in speculative investments because of a lucky market swing

Overreaction Bias

• Strong emotion associated related to a dramatic news event and whether that affects stock prices

• Ex. fundamentally strong company misses quarterly expectations, investors sell off

Representativeness Bias

• Assumes that a good company or strong performance automatically makes a great investment

• Ex: the rush into AI related stocks following Nvidia success

Sunk Cost Fallacy

• Continuing an avton simply because you have already spent time, money or effort on it, even when stopping is logical choice

• Ex. slot machines

Endowment Effect

• Placing a higher value on something than its actual market worth

• Ex. Inherited items

Flate Rate Bias

• Tendency to pay a flat rate over paying for actual usage, even if the cost of the flat rate is higher

• Ex. Budget billing on WE Energies

Mental Accounting Bias

• Habit of treating money differently based on where it came from or what we plan to use it for

• Ex. Using cash vs credit card

Cognitive Dissonance

• Inner conflict someone experiences when their thoughts are in conflict with one another or when actions are in conflict with their values

• Ex. You want to lose weight, but you eat a tray of brownies

Prospect Theory

• People value gains and losses differently and will base their decisions on perceived gains rather than perceived losses

• Ex. Selling a stock to make a small profit out of fear that the fain will disappear

The Disposition Effect

• Behavioral bias where investors sell winning investments too early and hold onto losing investments for too long

Cognitive Biases

As a financial planner, you have to be aware of these biases and how to manage them with a client. This comes down to learning style, communication style, money beliefs and previous experiences/emotions.

Financial Psychology

• Incorporates a board spectrum of related disciplines and subspecialties of psychology, including:

  • Behavioral finance

  • Financial therapy

  • Clinical and cognitive psychology

  • developmental psychology

  • Human Sciences

Money Beliefs

• Each client and each planner has their own perceptions of the purpose of money and how it should be used and managed.

• Often inherited from parents and other family members

• One person can have more than one money script

Money Scripts

1. Money avoidance: “I do not deserve a lot of money”

2. Money worship: “things would be better if I had a lot of money”

3. Money status: “your self-worth equals your net worth”

4. Money vigilance: “money should be saved not spent”

Money Disorders

• Compulsive Buying Disorder

• Hoarding

• Gambling Disorder

• Workaholism

• Financial Enabling and Financial Dependence

Sources of Money

• Financial infidelity

• Saving

• Spending

• Priorities

• Requests for Assistance from Family and Friends

• Financial Enmeshment

Motivation and Self Determination Theory

• Intrinsic motivation: doing something b/c you value the activity; acting based on sense of personal commitment

• extrinsic motivation: doing something b/c you are bribed to do it; acting based on external pressure to perform

• Self-Determination Theory

  • There are 3 main psychological needs that determine motivation

    • Competence + Relatedness + Autonomy= intrinsic motivation

• Cognitive Evaluation Theory: subtheory of SDT

  • feedback, communication, and rewards that are conducive to feelings of competence can enhance intrinsic motivation.

Approaches to Financial Planning

1. The Life Cycle Approach

2. The Pie Chart Approach

3. The financial statement and ratio analysis approach

4. The two-step/three panel approach

5. The metrics approach

6. The present value of all goals approach

7. The cash flow approach

8. The strategic approach

The Life Cycle Approach

Very Broad approach

This approach gathers and analyzes the following information:

• The ages of the client and spouse

• The client’s marital status

• The number and ages of children and grandchildern of client

• The family income by each income contributor

• The family net worth

• Whether the client is self-employed, an employee, unemployed or retired (employment status)

Young Personal Market (Age 22-35)

• Core Financial Goals: Focus heavily on building budgets, paying down student loan debt, buying first homes, and managing early-career cash flow

• Technology expectations: Demand mobile-first, sleek digital experiences, real-time portfolio tracking, and a blend emphasis on aligning personal finances and investments with individual social causes and ethical values

• Higher Agency: Feature a high rate of financial independence, particularly among younger women managing their own households and investment decisions

• The Asset Barrier: Many young clients posses modest current investable assets but represent significant lifetime value as their earnings grow

• Alternative Pricing: Traditional high management fees do not fit this demographic, forcing advisors to adopt subscription models, project-based fees, or scalable fintech.

Established Family Market

• Demographics: Usually adults aged 35-55 (often Gen X or older millennials) with stable careers, established homeownership, and growing investment portfolios

• The “Sandwich Generation”: Clients often feel financial pressure from both ends- paying for teenage or college bound children while simultaneously supporting or planning care for aging parents

• Financial Priorities: Moving past basic survival budgeting toward debt reduction (mortgages), wealth accumulation, tax-effective retirement planning, and risk management.

• Cash Flow & Debt Management: Balancing everyday household expenses with long-term savings

• Risk Protection: Securing adequate life, disability, and trauma/critical illness insurance to protect dependents from sudden income loss

• Education Funding: Saving for children’s private schooling or college tuition (such as through 529 plans)

• Intergenerational & Estate Planning: Managing aging parent care costs and beginning preliminary legacy or wealth transfer strategies

Pre-Retiree/Retiree Market

Commonly referred to as the Critical 10/15

• Age group: Mostly clients in there 50s and early 60s

• Mindset shift: Moving away from aggressive accumulation toward risk management and asset protection

• Urgency: Increased focus on final savings targets and retirement readiness

• Catch-up contributions: Utilizing extra savings allowances for people over 50 in accounts like 401 (ks) and IRAS

• Retirement Distribution Planning: Designing a reliable cash flow plan using Social Security, Pensions, and personal savings

• Risk mitigation: Reducing exposure to sharp stock market drops that could hurt the portfolio right before retirement, a danger known as sequence of returns risk

• Healthcare Planning: Preparing for out-of-pocket medical costs and planning Medicare enrollment before employer heath insurance ends

• Tax Strategy: Managing withdrawals and future required minimum distributions (RMDS) to lower lifetime tax bills

The Pie Chart Approach

• Forces the client to focus on the fact that there is only one pie

• People can only spend what they have and visualizing where the money goes is often a sobering lesson

• Is an effective analytical and illustrative tool for financial planning clients

60/20/20 rule

• 60%: Fixed expenses

• 20%: Savings Goals

• 20%: Discretionary Expenses

50/30/20

• 50%: Needs

• 20%: Wants

• 20%: Savings

The Financial Statement and Ratio Analysis Approach

the approach uses four types of financial ratios:

1. Liquidity Ratios: measures ability to meet short-term obligations

2. Debt Ratios: tells us how good a client is at debt management

3. Ratios for financial security: help us assess the progress the client is making toward achieving long-term goals

4. Performance ratios: calculates return on investments

Liquidity Ratios

Emergency Fund Ratio:

Cash & Cash Equivalents/Monthly Non-Discretionary Cash flows= 3-6 months

Current Ratio:

Cash & cash equivalents/current liabilities ≥ 1.0

Debt Ratios

• Housing Ratio 1 (HR1) (Basic)

  • Principal payments on mortgage (or rent), interest, HOI, prop taxes, HOA

• Housing Ratio 2 (HR2) (broad)

  • HR1 + all other monthly debts (car loans, student loans, bank loans, revolving consumer loans)

• Debt-to-total assets ratio

  • Leverage ratio; reflects portion of assets owed by a client that are financed by creditors

• Net worth-to-total assets ratio

  • Complement Debt-to-Total Assets; the two add up to one.

Housing Ratio 1

Housing Costs/Gross Pay ≤ 28%

• Principal payments on mortgage (or rent), interest, HOI, prop taxes, HOA

Housing Ratio 2

Housing Costs + Other Debt Payments/Gross Pay ≤ 36%

• HR1 + all other monthly debts (cat loans, student loans, bank loans, revolving consumer loans)

Debt-to-Total Assets

Total Debt/Total Assets= Benchmark depends on age of the client

Net Worth-to-Total Assets

Net Worth/Total Assets= Benchmark depends on age of the client

Financial Security Ratios

Savings Rate

Savings + Employer Match/Gross Pay

• Benchmark depends on client’s goals

Investment Asset- To- Gross Pay=

(Investment Assets) + (Cash + Cash Equivalents)/Gross= Benchmark Depends on Client Age

Performance Ratios

Return on Investment (ROI)

• Ending Balance- (BB + Savings)/BB

Return on Assets (ROA)

• Ending Assets - (Beginning Assets + Savings)/Beginning Assets

  • Benchmark is 2-4%

Return on Net Worth (RONW)

• Ending Net Worth - (Beginning Net Worth + Savings)/ Beginning Net Work

  • Benchmark is “the higher the better)

The Two Step Approach

• Is to cover the risks and then save and invest

• It looks at personal risk as potentially leading to catastrophic loss or dependence on someone else for financial well-being

• The __ apporach considers saving and investments as the path to financial security or independence

The Three-Panel Approach

• Refinement of the 2-step approach

• Divides saving and investing into short and long-term objectives

• Goal is not necessarily how much a person needs, but rather whether the retirement goal is being met by:

  • Savings rate of 10-13%

  • Investment assets of a certain amount that are an appropriate percentage of gross pay depending on age of the client.

Metrics Approach

• Provides quantitative example benchmarks for the financial planner and client to use as guidance for achieving comprehensive financial goals and objectives

  • `Caution: Benchmarks are blanket, not fully personalized

  • Once the planner has analyzed and evaluated the client’s actual financial situation, the metrics can be applied to establish recommendations

Risk Tolerance and Asset Allocation P1

• Financial Planners employ tools to assess the client’s willingness to accept investment risk, thus helping to determine the client’s risk tolerance as part of the investment planning process

  • Expected ROR is a very important variable in determining required savings rate.

• PASS Score: Global Portfolio Allocation Scoring system

  • Considers both time horizon and risk tolerance in determine appropriate asset allocation

• Asset Allocation

Risk Tolerance and Asset Allocation P2

• Client’s risk tolerance is a combo of both the ability and willingness to accept risk

• Designing an appropriate investment strategy requires assessment of risk tolerance and client’s goals

  • Client investment ability (objective state of being based on client’s financial profile)

  • Client’s willingness to take on investment risk (subjective state of being)

  • Can require a decent amount of education time horizon, market fluctuations and historical market performance

The Present Value of All Goals Approach

Basic premise: translate every future goal into today’s dollars then add them up. Reduces a client’s whole financial life to one number. Resources-Goals = Plan

1. Identify each goal and its time horizon

2. Discount each goal back to present value

3. Sum the present values into on total goal liability

4. Add current assets + present value of future savings

5. Compare resources to liability - surplus or shortfall

Discounting is just time value of Money (PV= FV / (1+R)^N

The Present Value of All Goals Approach P2

PVAG sizes the problem for a client - typically used in conjunction with other planning tools like a Monte Carlo Analysis

• Deterministic - balance-sheet view

• Answers: “whats the dollar gap to these goals”

• Captures time value of money

• Easy for clients to grasp

Monte Calrlo stress-tests the pathway under PVAG

Cash Flow Approach: Most Common

Basic Premise: Project income against expenses, year by year, through life expectancy

If cash flow stays positive every year, the plan works. If it goes negative, you’ve found the bottleneck and the year it hits

Steps:

1. Map current Income and expenses

2. Project both forward, year by year

3. withdraw from portfolio to cover any shortfall

4. Test whether the portfolio ever hits zero

5. Adjust based on stress test - retire later, save more, cut spending and then retest

Cash Flow Approach

Three things a balance sheet approach cannot show that this can:

1. Bottleneck year: large expenses before income arrives

• College before social security, early retirement gap before Medicare

2. Sequence Risk: market downturn in the first years of retirement

3. Sustainability: whether the withdrawal rate is survivable, not just whether the total is enough

Cash Flow Approach: Buckets

This approach is how most financial planning software is structured to solve for:

Near Term:

• 1-2 years

• Cash/short-term bonds

• Covers immediate withdrawls

Mid-term:

• Bonds/income

• Covers the middle years

Long-term:

• Equities/growth

• Funds the back half

Buckets exist because you don’t sell equities in a down year to cover a near-term

Cash Flow Approach: Pros/Cons

Pros:

• Intuitive for clients

• Captures timing and bottlenecks

• Natural fit for retirement income

• Reveals sequence risk

Cons:

• Long projections can get fragile

• Awkward for one-time goals like legacy

• Doesn’t collapse neatly into one number

• More sensitive to input assumptions (ROI, Inflation, etc.)

The Strategic Approach: Starts with the person

Build the plan around the client’s values and human capital, then do the math

• Mission Statement

• Goals

• Objectives

The Strategic Approach Steps

1. Discover the client’s values and life goals

2. Assess total wealth—— financial capital plus human capital

3. Determine risk capacity, not just risk tolerance

4. Prioritize and sequence goals across total wealth

5. Integrate investments, insurance, tax and estate around the strategy

6. Review and adapt as life goals change

Good Debt

has two components:

1. The interest rate is relatively low in comparison to expected inflation and expected investments returns

2. The expected payback period is substantially less than the expected economic life of the asset

• Shorter than 30 year mortgage

• Federal student loans potentially subject to PSLF or forgiveness

• Car loan with repayment of 3 years

Reasonable Debt

is where the payback period is longer or the returns on the debt are no doubt positive, but less certain

• 30 year mortgage

• Private student loans with higher interest rates

• Car loan with repayment of 4-5 years

Bad Debt

Can involve high interest rates or when the economic life of a purchase is exceeded by the associated debt payback period

• Payday loans

• High interest credit cards

• Car loan with repayment period longer than economic life of car

Debt Management: Minimizing Finance Costs

• Use secured loans: collateralized

• Manage the credit report

  • Hard vs soft inquiries

  • Know what is included in the report

  • check it regularly

• Manage the credit score

  • FICO vs VantageScore

• Engage in efficient debt repayment Plans

Debt Repayment Plans

The most effective plan is the one the client will stick to. Psychological factors

• Avalanche Strategy

• Snowball Strategy

Avalanche Strategy

Paying the least amount of interest

• Pay the minimum payment on all cards

• Allocate any additional payment first to the debt with the highest interest rate; when paid off, allocate those payments to the debt with the next highest interest rate

Snowball Strategy

Smallest balance first

• Pay the minimum payment on all cards

• Allocate any additional payment first to the debt with lowest balance; when paid off, allocate those payments to the debt

Personal Financial Statements Overview

Primarily used as a scoring mechanism for capturing and analyzing an individual’s financial position and performance.

• Balance sheet

• Income & Expense Statement

• Statement of Cash Flows

• Changes in Net Worth

The Balance Sheet

A listing of assets, liabilites, and net worth: A= L + E

Assets

• Cash & Cash Equivalents

  • Highly liquid, low-risk, short-term

  • Ex. Checking and Savings, CDs (<12 months), money market funds, Treasury bills

• Investment Assets

  • Held for growth and income, not personal use

  • Ex. 401 (k), IRAs, brokerage accounts, business income, education savings, stocks & bonds

• Personal Use Assets

  • Use in daily life, not for investment

  • Ex. Personal residence, autos, furniture, clothing, jewelry, collectibles

Liabilities

• Current L

  • Due within one year

  • Ex. Credit card balances, current portion of auto loans, utility bills, taxes due, short-term personal loans

• Long-Term Liabilities

  • Due beyond one year

  • Ex. Mortgage balance (minus current portion), remaining auto loans, student loans, home equity loans

Net worth = A - L

Balance Sheet Limitations

• Estimates: Personal use asset values are often estimates—- home, furniture, collectibles may not reflect true market value

• Timing: A single snapshot may not represent the client’s typical financial position at other points in the year

• Missing Information: Doesn’t show income, spending patterns, or cash flow— only what exists on that date

• Historical Cost: Some assets are carried rather than market value, understating true net worth

• No Content: Doesn’t explain how the client arrived at this position or were they’re heading next.

State of Income and Expenses

A listing of income, savings, and expenses of over a period of time.

• Income: Salary, interest, dividends, business income, rental income, capital gains

• Savings: Deposit to retirement plans, education savings, and other savings—treated as a use of income

• Expenses: Both fixed (mortgage, insurance, loan payment) and variable (food, entertainment, utilites)

Income — (Saving + Expenses) = Net Cash Flow

Fixed vs. Variable Expenses

• Fixed Expenses

  • Don’t change month to month; contractual obligations

  • EX. Mortgage/rent, auto loan payments, insurance premiums, property taxes, tuition, child support

• Variable Expenses

  • Fluctuate based on behavior and choices

  • EX. Food/groceries, dining out, entertainment, travel, clothing, utilties, gifts

Insight: Treating savings as a fixed expense (“Pay yourself first”) is a poweful budgeting strategy

Income & Expense Statement Limitations

• Cash vs. Accrual

  • May not reflect actual cash flow — income earned but not received still appears

• Non-Recurring Items

  • One-time income or expenses may distort the true ongoing picture

• Estimates

  • Variable expenses and annual costs spread monthly are often estimated

• Capital Gains

  • May not be captured consistently across periods

Supplemental Financial Statements

Changes in Net Worth:

• Shows how net worth changed between two balance sheet dates. Reconciles beginning and ending net worth, identifying whether changes came from savings, appreciation, or other sources.

Statement of Cash Flows:

• Tracks actual cash inflows and outflows. More precise than the income statement for liquidity analysis. Distinguishes between cash and non-cash items. Critical for understanding true liquidity.

Budgeting

is discovery, not restriction

Tips for success

• Frame the process as a way to discover current habits

• The client is in control of any adjustments

• Be realistic with spending behavior

• Budget a line item for miscellaneous and unforeseen expenses

• Being successful with a budget takes picture.

Behavioral Psychology Concepts

• IKEA Effect: People value things they help create — involve the client in building the budget

• Present Bias: People overvalue immediate rewards — structure budget for short-term wins

• Positive Psychology: Frame progress positively and celebrate small wins

• Motivational Interviewing: Help clients find their own motivation for change.

The Budget Process

1. Establish Goals: What does the client want to achieve?

2. Determine Income: All sources for the time period?

3. Determine Expenses: Both fixed and variable?

4. Net Discretionary Cash Flow: Is it positive or negative?

5. Express as % of income: Present expenses as a percentage of income