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Why Is It Important To Create A Cash Flow and Net Worth Statement?

By John McCord, Cardinal Point Wealth Management

An often over looked component of personal financial planning includes the creation of a cash flow and net worth statement. It is highly recommended that these two related documents become an integral part of the financial planning process. An insightful financial advisor can utilize details found in both to qualify and quantify their client's financial affairs. Further, the documents assist in setting realistic goals, clarify tax-planning needs and reveal risk management requirements. A smart rule of thumb is to update both documents annually. In order to accomplish the preceding, individuals, families and their advisers are required to assemble their current financial statements from brokerages, banks and credit card companies etc. What information does a cash flow and net worth statement contain and why is it important?

The cash flow statement reveals inflows and outflows of cash receipts and disbursements over a period of time. A few examples of inflows are bonuses, pensions, dividends and alimony income. Some examples of outflows are insurance premiums, education charges, travel costs and medical expenses. It is important to subtract the total of the cash outflows from the total of the cash receipts. The result of this calculation produces a positive or a negative number and illuminates the spending patterns of an individual or family.

The remainder can be saved when a positive number results from the calculation. For example, tax-advantaged accounts can be funded from annual cash flow savings. Some common tax-advantaged accounts are offered for education, health and retirement. Conversely, a calculation resulting in a deficit indicates that an individual or family requires additional income to offset their spending patterns. Likewise, a reduction in spending is another important method in balancing net cash flow. It is important to note that cash flow statements offer the most reliable information regarding future income and spending patterns.

The net worth statement is comprised of three distinct but interrelated components. The components are assets, liabilities, and net worth. Assets are defined as items that an individual or family owns. Some examples are cash, stock, fixed income and a home. Every effort should be made to value the assets at their fair market value. Liabilities are defined as what is owned to third parties. A few examples of liabilities are auto, student and mortgage loans. Net worth is a key figure of the net worth statement and is an important element of financial health. This number is determined by subtracting total liabilities from total assets. A higher net worth facilitates additional financial flexibility for an individual or a family. Conversely, a low or negative net worth is indicative of less financial freedom and flexibility.

There is no "one size fits all" cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Please contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.