Looking at Both Sides of Cash Flow
Looking at Both Sides of Cash Flow
Let's review. If cash flow is the timing of expenses and income, (income less expenses), why do most financial consultants only look at the income?
At Money Counts we look at both the income and expense side of cash flow.
To understand how Money Counts consultants work with you on both sides of cash flow, let's look at an example*:
- Income: $80,000
- 401k: 15% max contribution
- Employer Matching: First 5%
- Home Value: $275,000
- Home Mortgage: 15 year
- Home Mortgage Loan Balance: $190,000
- Mortgage Interest: 6.5%
- Mortgage Payment: $1,655
- Single Income
- Credit Card Debt: $10,000
- Credit Card Interest: 15%
- Minimum Credit Card Payment: $200
The couple was planning to pay off the $10,000 credit card debt with the company bonus, but the bonus was reduced significantly and the car needed tires --- no more bonus. This family decided that the mother would stay at home with their two children for the next 3 years, until they started school.
At Money Counts we look at the total client picture. We discuss not only your money but also you and your family. In our example the credit card is causing stress and the interest rate is high and not deductible. It is a big "cash flow leak" that we want to plug. Where can we get the money? What can we do to have a better family life and allow one parent to stay home with the children?
Actually there are not one, but two different scenarios that could allow for both the mother to stay home and pay off the credit card debt.
Scenario 1 - Home Financing
How likely is it that this family will be in their home for the next 15 years?
Is it important to get one's home paid off early?
What will happen to your income tax bracket if you lose their tax deduction?
The current issues could be solved by converting the loan to an interest only loan for 10 years and then revert back to a fixed loan. Here is how this strategy might help you.
- Refinance the loan to interest only at 3% and take out an additional $10,000 to pay off the credit card debt.
- Estimated closing costs - $3,000.
- The new loan balance would be $203,000.
- All closing costs could be rolled into the loan to eliminate extra expenses right now.
- The new mortgage payment is $510 per month, representing an expense savings of $1345 / month (the old 15 year mortgage payment of $1655 + the minimum credit card payment of $200 / month less $510)
- Additional principal can be paid at any time, allowing them to pay down the principal with the extra cash if they choose. If they pay $1,855 / month (their old monthly debt payment), they will pay off the credit card portion in 7 and a half months.
- Two more months and they will have paid off the cost of closing.
The extra $1,345 can be used to continue to pay down the mortgage which now includes the previous credit card debt or it can be put to other uses. If they resume the $1,655 payment, the house will still pay off in 15 years.
An extra precaution would be to take out an open ended home equity line to provide for emergencies or opportunities. There is no cost unless you use the line. This family would likely to qualify for a $45,000 cushion.
Scenario 2 – 401k Contribution
What tax bracket are you in?
How much is that tax deduction worth to you?
Do you realize that the tax savings stay in the retirement plan and not in your pocket?
Do you believe that your tax rate will be lower more than 30 years from now?
If it is, will you be able to afford to retire?
Maybe the strategy is a good one, but prioritization and timing need adjustment.
- Current Plan contributions are $1,000 per month
- Matching employer contribution is $333
- Reducing the monthly contribution to achieve the maximum employer match
- Estimating this family's tax bracket at 20%, they would net a $533/month improvement in cash flow.
- If this family acted on Scenario 1, they could also do this and add the extra money to the mortgage payment, paying of the credit card portion of the principle in just over 5 MONTHS!
- One and a half more months to cover the closing cost portion, and now this family will have the $533 per month plus the $1,345 per month – or $1,878 available.
- This family could do Scenario 1, 2 or both. Once the debt is paid off, the 401k contributions could resume.
- At the end of year 3 when the mother goes to work, she may also be able to contribute to a retirement plan, resulting in more dollars available.
At Money Counts, we want to assist you with making these decisions and help you choose the best ones for your individual situation. We have only illustrated two out of dozens of cash flow options we could find in this example.
Give us the opportunity to assist you with your cash flow planning and help maximize your current and future financial potential.
* * This does not represent financial advice. It is intended for clarity purposes. No financial advice will be offered by Money Counts until we have a complete understanding of your individual financial picture. This hypothetical investment results are for illustrative purposes only and should not be deemed a representation of past or future results. Actual investment results may be more or less than those shown. This does not represent any specific product.