Five Step Cash Flow Program for Parents - Step Five

STEP FIVE

Evaluating Assets and Liabilities

It is now time to open the information you have accumulated in your files.  We asked you to write down your assets.  Look over the list of assets and find assets that can be used to help pay for college.  Some of these assets can be liquidated or borrowed (leveraged) against.

           

Examples:

• Fixed Income Investments
• CD’s
• Bond Accounts
• Stock Mutual Funds
• Rental Real Estate
• Undeveloped Land
• Cash Value Life Insurance
• Personal Residence
• Second/Vacation Home

           

Try to find assets that are not productive (income wise) or instead of having income producing assets reinvest its earnings, take the income in cash to help pay for college.  If you will not qualify for financial aid (no scholarships or grants) and you want to liquidate an asset that has a capital gain think about gifting the asset to the student and let them sell the asset and pay lower capital gains taxes (check with your CPA on the Kiddy Tax Rules). 

If you sell an asset that has a capital gain you may pay a capital gains tax of 15%.  If you gift the asset to the student and they sell the asset they may only pay 5%.  Make sure to consult with their professional tax planner before selling or gifting any assets (Ask About The Kiddy Tax Rules).

If you decide to borrow against these assets you can use the borrowed money to pay for educational costs and could deduct the interest on the borrowed funds as a student loan interest deduction on your taxes.

You can deduct up to $2,500 a year as long as their income is with in a certain limit (check with their tax professional). 

The following pages will give you an idea on how to use the equity in your home to pay for college and benefit in THREE ways.

Ideas On How To Use Equity In A Home

A personal residence loan is one of the few investment vehicles whose interest charges are tax deductible. Families in middle and high income tax brackets can take maximum advantage of this tax write-off.

Parents, whose income is too high to take advantage of the student loan interest deduction, could use the interest on a mortgage loan to provide an itemized tax deduction.  There are a wide variety of personal residence loans that can be used to fund college expenses. The family can use any combination of mortgage loans with fixed or adjustable rates to meet their intentions, including those with minimum monthly payments while the student is in college.

Many families find themselves with a shortfall of funds to pay the entire cost of college and end up with a cash flow problem.

To increase cash flow the family can either do one of two things:

·         Increase their assets, or

·         Decrease their liabilities (debt).

Here Is A Planning Tip:

Families can use the same method used by many corporations to decrease liabilities and increase cash flow called DEBT RESTRUCTURE or DEBT CONSOLIDATION.

Hundreds of Companies do this by refinancing their assets and consolidating all their debts into one smaller payment extended over a longer period of time. 

This allows the company to make their assets more productive and establishes a new budget for expenditures.

Families can significantly increase their cash flow by applying the same debt consolidation methodology to their liabilities, such as home mortgage, car loans and credit card debt.

By consolidating your debt payments into one lower payment, you can increase cash flow to pay college expenses, fund your retirement and even pay your home mortgage off earlier than anticipated once the student is out of college.

The theory behind debt consolidation is simple. 

Home equity is one of the family’s main assets, yet home equity is a very unproductive asset. Home Equity DOES NOT earn interest.  You can increase home equity by one of two ways,

·         Increasing the value of your home by making improvements

• Decreasing the debt owed on it

If you leave equity in your home, the home equity asset remains dormant (earning no interest) and unproductive until you sell your home.

The only way to make home equity productive, during the time you own the home, is to borrow the excess equity and wisely use the increased cash flow for productive purposes such as using the equity for investment purpose, pay off BAD high interest installment and car loans or credit cards.

By refinancing the family’s personal residence, the old mortgage and all other high interest/high cost debt can be paid off with a new, lower cost mortgage or using the equity to invest into tools that are designed to accumulate wealth.

The result is a lower monthly payment that creates extra cash flow that can be used to pay college expenses or retirement.

There may also be additional tax deductions available with the new mortgage that can further increase your cash flow availability.

Let’s Look At An Example: 

The Smith family would like to send their children (Johnny – a senior and Sally – a sophomore) to college.  Mr. and Mrs. Smith earn a total of $75,000 per year in income, but have saved absolutely no money to cover Johnny and Sally’s educational expenses. Mr. Smith is 47 years old.

Johnny and Sally plan to contribute to their own education by taking out student loans, but the Smith’s will still need around $80,000 to fund the balance of both educations.

The Smith’s have few assets and considerable debt and estimate that they can only contribute $400 per month ($4,800 per year) from their current income towards educational expenses, without dramatically changing their present lifestyle (they developed a Strategic Cash Flow Plan).

The Smith’s decide to refinance their current $120,000 in debt (mortgage and high cost consumer debt) into a new, $134,400, 30-year mortgage.

Prior to consolidating their mortgage they were making monthly payments of - $665 on their home - $420 on car loans – $220 on credit card debt - $150 on a personal loan they used to buy furniture.

All their debt totaled $120,000 at a monthly payment of $1,455.

They decided to refinance their home for $134,400 and pay off all their other debt with $14,400 left over that they would use to help pay for the students college education.  Using the Debt Consolidation, the Smith’s will achieve a considerably lower monthly payment ($1,455 vs. $894) and increase their cash flow by $561 per month.

They will also receive a lump sum cash amount of $14,400 from the new mortgage. This additional cash flow, combined with the student loans and the Smith’s $400 per month contribution from current income, will allow the Smiths to do the following:

• Fund Johnny and Sally’s educational expenses. The $14,400 reserve funds can be used when the Sally starts college in the third year because of the shortage of income from the cash flow.  Once Johnny graduates from college, the reserve fund would be reduced to $8,206 and will no longer be needed to draw from.
• Once Johnny and Sally are no longer in college the Smiths can take the $961 of monthly payments they were paying toward college expenses and start to pay toward their 30-year mortgage.  By prepaying their mortgage they will have the house paid off in 13 years.  By this time Mr. Smith is age 60 and the reserve account has grown to a value of $13,451 (based on a 7% return after taxes).

·         After the mortgage is paid off, the Smith’s can take the $961 a month and apply it toward their retirement.  By the time Mr. Smith reaches age 65 they would have accumulated $155,838 into their retirement, base on a 7% after tax return on the investment (this also includes the money reserve they started with at the beginning of the planning process).

You maybe asking, what if the Smiths need a new car while the kids are in school, want this throw their plan out of balance?

NO, not really, because the new car payments can be made by the increase in income that Mr. and Mrs. Smith would receive from their employment if they receive wage increase of 3 to 4 percent yearly.

By knowing how to borrow correctly the Smith’s will not have to change their current financial lifestyle or tap into their retirement fund in order to pay for their children’s college educations.

The Chart on the next page will illustrate how this idea is incorporated.

The Cash Flow Analysis Table below demonstrates the Smith’s Personal Residence loan strategy.

STEP FIVE

Evaluating Assets and Liabilities

It is now time to open the information you have accumulated in your files.  We asked you to write down your assets.  Look over the list of assets and find assets that can be used to help pay for college.  Some of these assets can be liquidated or borrowed (leveraged) against.

           

Examples:

• Fixed Income Investments
• CD’s
• Bond Accounts
• Stock Mutual Funds
• Rental Real Estate
• Undeveloped Land
• Cash Value Life Insurance
• Personal Residence
• Second/Vacation Home

           

Try to find assets that are not productive (income wise) or instead of having income producing assets reinvest its earnings, take the income in cash to help pay for college.  If you will not qualify for financial aid (no scholarships or grants) and you want to liquidate an asset that has a capital gain think about gifting the asset to the student and let them sell the asset and pay lower capital gains taxes (check with your CPA on the Kiddy Tax Rules). 

If you sell an asset that has a capital gain you may pay a capital gains tax of 15%.  If you gift the asset to the student and they sell the asset they may only pay 5%.  Make sure to consult with their professional tax planner before selling or gifting any assets (Ask About The Kiddy Tax Rules).

If you decide to borrow against these assets you can use the borrowed money to pay for educational costs and could deduct the interest on the borrowed funds as a student loan interest deduction on your taxes.

You can deduct up to $2,500 a year as long as their income is with in a certain limit (check with their tax professional). 

The following pages will give you an idea on how to use the equity in your home to pay for college and benefit in THREE ways.

Ideas On How To Use Equity In A Home

A personal residence loan is one of the few investment vehicles whose interest charges are tax deductible. Families in middle and high income tax brackets can take maximum advantage of this tax write-off.

Parents, whose income is too high to take advantage of the student loan interest deduction, could use the interest on a mortgage loan to provide an itemized tax deduction.  There are a wide variety of personal residence loans that can be used to fund college expenses. The family can use any combination of mortgage loans with fixed or adjustable rates to meet their intentions, including those with minimum monthly payments while the student is in college.

Many families find themselves with a shortfall of funds to pay the entire cost of college and end up with a cash flow problem.

To increase cash flow the family can either do one of two things:

·         Increase their assets, or

·         Decrease their liabilities (debt).

Here Is A Planning Tip:

Families can use the same method used by many corporations to decrease liabilities and increase cash flow called DEBT RESTRUCTURE or DEBT CONSOLIDATION.

Hundreds of Companies do this by refinancing their assets and consolidating all their debts into one smaller payment extended over a longer period of time. 

This allows the company to make their assets more productive and establishes a new budget for expenditures.

Families can significantly increase their cash flow by applying the same debt consolidation methodology to their liabilities, such as home mortgage, car loans and credit card debt.

By consolidating your debt payments into one lower payment, you can increase cash flow to pay college expenses, fund your retirement and even pay your home mortgage off earlier than anticipated once the student is out of college.

The theory behind debt consolidation is simple. 

Home equity is one of the family’s main assets, yet home equity is a very unproductive asset. Home Equity DOES NOT earn interest.  You can increase home equity by one of two ways,

·         Increasing the value of your home by making improvements

• Decreasing the debt owed on it

If you leave equity in your home, the home equity asset remains dormant (earning no interest) and unproductive until you sell your home.

The only way to make home equity productive, during the time you own the home, is to borrow the excess equity and wisely use the increased cash flow for productive purposes such as using the equity for investment purpose, pay off BAD high interest installment and car loans or credit cards.

By refinancing the family’s personal residence, the old mortgage and all other high interest/high cost debt can be paid off with a new, lower cost mortgage or using the equity to invest into tools that are designed to accumulate wealth.

The result is a lower monthly payment that creates extra cash flow that can be used to pay college expenses or retirement.

There may also be additional tax deductions available with the new mortgage that can further increase your cash flow availability.

Let’s Look At An Example: 

The Smith family would like to send their children (Johnny – a senior and Sally – a sophomore) to college.  Mr. and Mrs. Smith earn a total of $75,000 per year in income, but have saved absolutely no money to cover Johnny and Sally’s educational expenses. Mr. Smith is 47 years old.

Johnny and Sally plan to contribute to their own education by taking out student loans, but the Smith’s will still need around $80,000 to fund the balance of both educations.

The Smith’s have few assets and considerable debt and estimate that they can only contribute $400 per month ($4,800 per year) from their current income towards educational expenses, without dramatically changing their present lifestyle (they developed a Strategic Cash Flow Plan).

The Smith’s decide to refinance their current $120,000 in debt (mortgage and high cost consumer debt) into a new, $134,400, 30-year mortgage.

Prior to consolidating their mortgage they were making monthly payments of - $665 on their home - $420 on car loans – $220 on credit card debt - $150 on a personal loan they used to buy furniture.

All their debt totaled $120,000 at a monthly payment of $1,455.

They decided to refinance their home for $134,400 and pay off all their other debt with $14,400 left over that they would use to help pay for the students college education.  Using the Debt Consolidation, the Smith’s will achieve a considerably lower monthly payment ($1,455 vs. $894) and increase their cash flow by $561 per month.

They will also receive a lump sum cash amount of $14,400 from the new mortgage. This additional cash flow, combined with the student loans and the Smith’s $400 per month contribution from current income, will allow the Smiths to do the following:

• Fund Johnny and Sally’s educational expenses. The $14,400 reserve funds can be used when the Sally starts college in the third year because of the shortage of income from the cash flow.  Once Johnny graduates from college, the reserve fund would be reduced to $8,206 and will no longer be needed to draw from.
• Once Johnny and Sally are no longer in college the Smiths can take the $961 of monthly payments they were paying toward college expenses and start to pay toward their 30-year mortgage.  By prepaying their mortgage they will have the house paid off in 13 years.  By this time Mr. Smith is age 60 and the reserve account has grown to a value of $13,451 (based on a 7% return after taxes).

·         After the mortgage is paid off, the Smith’s can take the $961 a month and apply it toward their retirement.  By the time Mr. Smith reaches age 65 they would have accumulated $155,838 into their retirement, base on a 7% after tax return on the investment (this also includes the money reserve they started with at the beginning of the planning process).

You maybe asking, what if the Smiths need a new car while the kids are in school, want this throw their plan out of balance?

NO, not really, because the new car payments can be made by the increase in income that Mr. and Mrs. Smith would receive from their employment if they receive wage increase of 3 to 4 percent yearly.

By knowing how to borrow correctly the Smith’s will not have to change their current financial lifestyle or tap into their retirement fund in order to pay for their children’s college educations.

The Chart on the next page will illustrate how this idea is incorporated.

The Cash Flow Analysis Table below demonstrates the Smith’s Personal Residence loan strategy.

As you can see from the above example, the Smith’s DID NOT change their lifestyle nor did they liquidate any of their assets.  Not only did they accomplish playing for college (private or public education) they were able to pay their 30-year mortgage off in 14 years and accumulate over $140,000 in additional retirement funds by age 65.

Note:  The costs of the students’ educations were $21,000 for a private education and $12,000 for a public education.  If the students attended a private college we assumed that they would qualify for college incentive scholarships.  If they attended the public college they would not receive any incentive scholarships or other forms of financial aid.

Refinancing – Many Benefits

Refinancing your debt into a home equity loan doesn't increase your debt. It doesn't add a dime to what you already owe. It just moves the debt.

By refinancing, you will shift the debt from various credit cards with differing due dates to one lender at a lower interest rate with a fixed repayment plan. In addition to the convenience of consolidating payments and payment dates, you can create a tax benefit like your parents had before 1987, when they could write off credit card interest on their taxes.

The major downsides to this strategy is it leaves you with refreshed credit limits on the plastic that you carry in your wallet and puts your home at risk if you do not pay the mortgage.

If you are not careful, you could wind up facing the same debt problems down the road.

Actually, many years of consulting tells me that most people will wind up in the same financial problems as before, since most individuals don't change the way they handle their money. 

This is where a knowledgeable financial consultant comes into play.  These professional individuals consult with their clients over a long period of time and they make sure you understand how to control your monthly spending. 

By refinancing your mortgage, it will give you a way to offset any immediate problem (college) and it will give you enough time to incorporate a financial game plan to increase you wealth and save for retirement. 

There are many other things that can be accomplished by understanding Cash Flow Planning.  The ideas and techniques that I have gone over is just the beginning.  If you need to talk or discuss some of the financial problems you are facing give me a call or send me an e-mail.

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Five Step Cash Flow Program for Parents - Step Four

Liability Worksheets

Once you have calculated your assets you will know how much you own.

Now you need to calculate how much you owe. 

Subtracting how much you owe from what you own will determine your net worth. The net worth can then be used to determine approximately how much you can afford to contribute to your children’s college education from your assets.

The following Parent Liabilities Worksheet is designed to give you a picture of the your debt position.

Believe it or not, there is good debt and bad debt and most families do not understand that concept.

A home equity loan is considered good debt, because homes appreciate in value and provide the owners with a tax deduction. 

On the other hand, credit card debt is considered bad debt because individuals are paying high interest rate finance charges for the privilege of using the credit card. 

Therefore, if you are carrying a high balance on your credit cards, you are actually paying more than the retail value for the goods you purchased.

The data from the following liability worksheets will allow you to review your current debt situation.

PARENT’S LIABILITY SHEET

Credit Card Balances                                                                $ __________

Income Tax Payable But Not Yet Paid                                        $ __________

Miscellaneous Accounts Payable

(Including personal loans to other individuals)                               $ __________

Personal Bank Loans                                                                $ __________

Loans Against Life Insurance Policies                                         $ __________

Loans Against 401K Pension Funds                                           $ __________

Automobile Loans                                                                     $ __________

Student Loans (parents only, i.e., Plus Loan, etc.)                       $ __________

Mortgage on Primary Residence                                                 $ __________

Second Mortgage on Primary Residence

Or Equity Line of Credit Debt                                                     $ __________

Mortgage on Second Home or  

Houseboat on Equity Line of Credit                                            $ __________

First Mortgage on Rental Real Estate                                         $ __________

Second Mortgage or Equity Line of Credit         

On Rental Real Estate                                                               $ __________

Bank Loans on Boat and RVs

(Other than houseboat)                                                              $ __________

Broker’s Margin Loans                                                               $ __________

Limited Partnership Debts                                                          $ __________

Loan from Employer                                                                  $ __________

Other Liabilities                                                                         $ __________

                                                                                                $ __________

                                                                                                $ __________

TOTAL LIABILITIES:                                                                $ __________

After you have completed this worksheet, make sure you did not leave anything out.

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Five Step Cash Flow Program for Parents - Step Three

STEP THREE

Evaluating The Family’s Assets and Liabilities

You now need to look at your assets and liabilities.  The following page will let you list your assets.  Pay close attention to where your assets are invested.  The asset and liability sheets that will follow in Step Four are designed to calculate your NET WORTH. 

These sheets will demonstrate how much you own and how much your owe.  

There are several reasons why you want to know your family’s net worth. 

You are looking for assets that are not productive, (CD, Money Market Accounts, Cash in Life Insurance, Large Balance In Checking Accounts, etc.).  I will explain how to use these items later.

You will find sample asset and liability sheets that I use on the next few pages.  If you have one that you rather use that is O.K.

 

PARENTS’ ASSET WORKSHEET

Cash in Checking/Brokerage Accounts                           $ __________

Money Market Funds/Accounts                                      $ __________

Fixed Income Investments

Savings                                                                        $ __________

CDs                                                                             $ __________

Government Securities/Funds                                        $ __________

Mortgage-Backed Securities                                          $ __________

Corporate Bond/Bond Funds                                           $ __________

Municipal Bonds/Bond Funds                                         $ __________

Other                                                                            $ __________

Stock Investments

Common Stock                                                              $ __________

Stock Mutual Funds                                                       $ __________

Other                                                                            $ __________

Real Estate Investments

Undeveloped Land                                                          $ __________

Rental Real Estate                                                         $ __________

Real Estate Limited Partnerships                                    $ __________

Real Estate Investment Trusts (REITS)                            $ __________

Ownership Interest in Private Business                            $ __________

Cash Value of Life Insurance                                          $ __________

Retirement-Oriented Assets

IRAs                                                                             $ __________

401K Plans                                                                   $ __________

Keogh Plans                                                                 $ __________

Simplified Employee Pension Plan                                 $ __________

Vested Interest in Corporate Pension

And profit-sharing Plan                                                  $ __________

Employee Thrift and Stock Purchases                            $ __________

Tax Deferred Annuities                                                  $ __________

Deferred Compensation Vested Value                            $ __________

Reverse Split Dollar Life Cash Value                              $ __________

Other                                                                           $ __________

Personal Assets

Residences                                                                   $ __________

Second/Vacation Home                                                 $ __________

Boat                                                                             $ __________

Recreational Vehicle                                                      $ __________

Automobiles                                                                 $ __________

Jewelry                                                                         $ __________

Personal Property

(Normally 40% of home value)                                       $ __________

Other Assets   

Trust Accounts                                                              $ __________

Other                                                                            $ __________

Total Assets:                                                                $ __________

After you have completed these worksheets, make sure you did not leave anything out that has any resale value.

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Five Step Cash Flow Program for Parents - Step Two

STEP TWO

 HOUSEHOLD EXPENDITURE

Once you have accumulated all your financial information you need to start putting everything together. 

Most families do not keep track of how they spend their money on a monthly basis, and therefore, their spending controls them.  This is no way of running a household.

Most parents do not realize they have two jobs, (1) the one they work nine to five every day and (2) the one that they go home to every night.  If you were to ask yourself, “Of these two jobs which one would be the most important to you, what would be your answer?”  

Most of you would say job #2.  This is the right answer, but if you were evaluated on the job you have at home (financially) like you are evaluated at the job away from home, most of you would be fired within a few months for mismanagement of company finances. 

Therefore, you must understand how you are spending your money (job 2) and by knowing what you are spending your money on will benefit your family as a whole and give you an opportunity to make adjustments in managing your cash flow.

I suggest completing the Household Expenditure Sheet.  The reason for this is you want to see how you are spending your money.  You should remember you are the only one that can control your spending. 

Plus, if you do things correctly you cannot depute your own figures.  Once again you are the only one that can control your spending.

The Household Expenditures Worksheet allows you to take control of your  spending by documenting exactly where your money is being spent, just like the company you work for from nine to five.  Most families cringe at the thought of documenting all their household expenditures.

However, once you recognize you bad spending habits, then you can take the necessary steps to adjust your spending in a positive direction.

If you take the time to complete the Household Expenditures Worksheet, you may be astounded to find that a few simple adjustments in your monthly spending habits can dramatically increase your cash flow for college, without changing your present lifestyle. 

How To Use The Cash Flow Sheet

The main purpose of the cash flow expenditure sheet is to see where and how you are spending your money.

Once the sheet is completed you should look at your fix expenses first and then your variable expenses next.

Pay close attention to unnecessary spending such as large TV cable bills, cell phone charges, spending money, lunches, recreation, and allowances.

Once you add up your total monthly spending, compare this amount with your NET INCOME (after tax income) from your income tax returns.  You should see an imbalance in these two figures. 

This imbalance could be negative or positive.  Most of the time it should be positive (have more cash available than you recorded on the cash flow sheet).

Look at your last two-paycheck stubs.  Add up all the deductions that are being withheld from your paychecks (health insurance, 401-k, group life, group DI, cafeteria plans, etc.)  Add these expenses to your total monthly expenses and then subtract the adjusted cash flow from your NET INCOME (after tax income.)

If you are getting an income tax refund, (federal and state) add this additional income to the total available income. 

Now you know your TOTAL AVAILABLE INCOME.  Most of the times you will see an imbalance between what you say you are spending and what you are ACTUALLY spending. 

In 80% to 90% of the cases you may not be able to account for $200 or more in spending that you do not know where it is going.  This is money that can be used to help pay for college, reduce debt, or up grade your life, DI, retirement contributions, etc.

On the next few pages you will find the cash flow sheets that I use.  If you prefer to use your own that is O.K. just make sure you cover all the items that I have listed on the cash flow sheets.

Some of the items you will see (*) a long side the items ▬ below is an explanation

*  Do not include these items if they are deducted directly from the clients paycheck

**  Monthly/annual savings and investments contributions are considered to be long-term if they are held for three years or more.  Money in long-term savings should not be used to pay for vacations, holidays, birthdays, anniversaries, insurance, home, auto repairs, or taxes as these items are already covered separately in the Household Expenditure Worksheet.  

HOUSEHOLD EXPENDITURES WORKSHEET

First Mortgage (primary residence) $ __________

Second Mortgage (primary residence) $ __________

Equity Line of Credit on Primary Residence $ __________

First Mortgage (second home) $ __________

Second Mortgage (second home) $ __________

Equity Line of Credit on Second Home $ __________

Total Property Taxes $ __________

Rent $ __________

Homeowner’s/Renter’s Insurance $ __________

Utilities $ __________

Telephone $ __________

Trash $ __________

Water $ __________

Sewer $ __________

Home Repair $ __________

Personal Loans and PLUS Loans for Student $ __________

Cable TV $ __________

Auto, Boat, RV Payments $ __________

Gas, Oil, Tire, ETC $ __________

Auto, Boat, RV Maintenance $ __________

Auto, Boat, RV Insurance $ __________

Auto, Boat, RV License(s) $ __________

Sundries $ __________

Groceries $ __________

Clothing $ __________

Dry Cleaning $ __________

School Related Expenses 

(Books, supplies, clothing) $ __________

**Long Term Investments $ __________

School Tuition, Fees, Room & Board $ __________

Medical/Dental Deductibles & Co-Pays $ __________

Tax Preparation Fees/CPA etc. $ __________

Drugs/Medical Supplies $ __________

*Health Insurance $ __________

*Disability Insurance $ __________

*Life Insurance $ __________

Church Donations $ __________

Charitable Donations $ __________

Vacations $ __________

Holidays $ __________

Birthdays $ __________

Anniversaries $ __________

Association Dues $ __________

Clubs & Organizations $ __________

*Professional Dues $ __________

Magazine/Book Subscriptions $ __________

Newspapers $ __________

Entertainment $ __________

Rental Movies $ __________

Children’s Allowances $ __________

Sports/Hobbies $ __________

Credit Card Payments $ __________

Annuity Investments (non-qualified) $ __________

*Pension Contribution $ __________

*Local/State/Federal Taxes $ __________

*Social Security Taxes $ __________

**Long Term Savings $ __________

Other/Short Term Savings $ __________

Cash Spending Money $ __________

TOTAL MONTHLY EXPENDITURES: $ __________

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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.

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