Understanding a Cash Flow Statement

Video Transcript

"Understanding a cash flow statement is pretty easy for most people. The hard part is coming down to good numbers on that cash flow statement. Obviously it's pretty easy to for most people who if there's W2 employees to figure out what their actual gross income is and then you look at your pay stubs and figure out what your take home pay is and minus your deductions for 401k or any insurance you're buying at work and OK, this is my take home pay. Most people have a real good idea of what their take home pay is. What they have difficult time doing is figuring out where it's going. So if I'm going to try to compile a cash flow statement for somebody like this, that is an exquisitely painful process. It's right in there with a root canal for most folks. Very, very uncomfortably for them because it forces people to really think. One way I've done it in the past is said go back in your checkbook and go back in your credit cards three months, add everything up and divide by three and there's your average cash flow but even that doesn't do it because you got a lot of one time expenses like tires, like hot water heaters and this and that and the other thing. And so the problem is not figuring out what you earn, the problem is figuring out where it's all going and all of these one time, oh It's Marty's birthday OK? Or we took the trip and this and that and the other and so if you don't do it for a 12 month period or even a 2 year period, you really don't get a handle. That's the vexing part of it. So typically I don't take people there. I simply ask a question, do you feel like you have a positive or a negative cash flow every month and then we get inside the numbers, we look at their credit report and if their credit card balances are going up, you can pretty well figure that they're spending more then they're making over time. And so you see that trend because a lot of folks don't have a handle on this. Now if I was their mom or dad, even if I'm their mom and I can't get them to sit down and do this stuff in most cases. So how do you help people and by the way, it doesn't matter if they're a professional, doctors and pharmacists and attorneys, no no no, they're just as bad at money management as anybody else. In fact sometimes they're worse and so when it comes to getting a handle on these numbers and it's important to get a handle on them, OK? The reason doctors in most cases end up more successful is they make so much money that they have a difficult time spending it all and it piles up and they're going to be OK unless they're really dysfunctional. But if you look at people's incomes, that doesn't necessarily correlate with wealth accumulation and building. It's more about how they're wired and how they were brought up as a child. But you can get inside the numbers and you can read this cash flow statement, you go auto loans, food, clothing, entertainment, personal expenses and that's where you get in the fuzzy areas and that's where it becomes difficult to come up with a number to work with but you have to estimate, you got to go somewhere with it and so hopefully I've been some help here, it's a vexing question."