Five Step Cash Flow Program for Parents - Step One

Why Use Cash Flow Planning

 

If you are the average American citizen, last year somewhere close to half of your income went to taxes.  Another way of looking at this is that every penny that you earned from January 1 until somewhere around the middle of April went to pay taxes in one form or another. This didn't just happen last year either. Almost five to six months out of each year you work for the benefit of various taxing authority coffers.

Parents Don’t Understand How Their Income Tax Returns Affects Their Family’s Financial Aid Eligibility

The financial aid formula runs off the parents’ and student’s income tax returns.  Income is the largest factor when it comes to qualifying for financial aid, NOT ASSETS.  Most middle and high income taxpayers will NOT qualify for NEED-BASED financial aid at most state supported colleges and universities.  Therefore, proper tax and cash flow planning is a MUST.  How you complete your income tax returns could create what we call TAX SCHOLARSHIPS, which could be more valuable than financial aid.

Before doing anything you need to develop a “Strategic Cash Flow Plan”  for your family.  

Over the next few days I will be posting the five steps that will give you a firsthand look at how to incorporate a cash flow plan.  Most families do not like going through this process because it is not fun and will consume a little effort and time.  However, If you do not want to use this system you could pay more for college than what is necessary.  This is the first most important step in paying for the cost of a college education without depending on financial aid.

STEP ONE

ACCUMULATE ALL FINANCIAL INFORMATION
 

The first step in the cash flow planning process is to get an overall view of your family’s household financial picture. 

Regardless of whether you have a student that is 15 years away from college, or presently in college, if you’re not exactly sure where you stand financially today, how can you expect to reach your future financial goals?

You as the parents, must develop a financial game plan to reach your goal of saving and paying for college.  You should calculate your income, assets, liabilities, and your tax status; as well as understand where you are spending your money.

Some of this financial data will also be used by the federal and state governments, the colleges, and other financial aid sources, to evaluate your family’s financial aid need.  This data is required information on the standard federal financial aid form, known as the Free Application for Student Aid, or FAFSA. It can also be used for the CSS Profile, a financial aid form used by some elite colleges to distribute their own pool of money for financial aid.  This financial data gathering is a very important first step in lowering educational expenses.

The financial data that you need to organize to develop a cash flow plan is as follows:

• The previous year’s federal, state, and local income tax returns
• Last two paycheck stubs
• The previous year’s W-2 forms and miscellaneous income records
• Records of untaxed income
• Current mortgage information
• ALL life, DI, property liability insurance policies (home, car, boat, etc.)
• Copy of employee benefit books (husband and wife)
• Business and farm assets and liabilities
• List of ALL personal assets and liabilities

·         A list of all household (spending) expenditures (income statement)

Once you have all the above information you have in front of you EVERYTHING your are spending your money on.  You have the bible of your financial affairs.

CASH FLOW PLANNING vs. BUDGETING

The difference between budgeting and cash flow planning is that a budget is a regimented spending plan, or a spending allowance that can change your lifestyle. Cash flow planning adjusts your current spending habits in order to continue your present financial lifestyle.

Example of cash flow planning:

Look at your last year’s income tax returns.  You may find out that you over paid your taxes by $1,500.  This is equal to $125 a month more taxes than you actually owed.  Then look at other items, like what you normally spend on groceries. 

Let’s say you spend $800 on groceries a month.  Look and see what you normally purchase, such as, meat, milk, sundries, cookies, household cleaners, and other items.  What would happen if one month you only spent $750 for groceries?

Would the family eat any less? 

You may not even notice.  Then the following month you can spend $800 for groceries, but make other adjustments to come up with the $50 such as: instead of eating out every weekend, eat out only two weekends of the month.  During the two weekends you give up, rent a movie and stay at home.  Then the next month you can go back to eating out each weekend and cut back other areas for that month.

Are you starting to get the picture?  A hard-core budget could have a detrimental affect on individuals when they start to completely eliminate the things they enjoy in life.