The other important document needed was statement of cash flow. The cash flow statement typically reflects a household's annual income less its discretionary and nondiscretionary expenses.
Income minus expenses is what we financial planners call net cash flow. Positive net cash flow is good. Negative net cash flow is bad. The Palmers had, at the time of this analysis, negative net cash flow.
In all but the rarest of cases, the essential equation rarely changes except through inheritance or a lottery win. Families with negative cash flow must increase income, reduce spending and modify goals or both.
In the Palmers' case, getting a handle on their budget — or what we planners call cash flow management.
Now when it comes to creating a budget it's important to understand that there are two kinds of expenses; discretionary and nondiscretionary. Discretionary expenses are typically non-essential expenses that can be avoided or trimed. Nondiscretionary or fixed expenses can be changed in some cases, but they must always be paid. Typically, nondiscretionary expenses include a mortgage, taxes, medical expenses and the like.
The Palmers noticed, given the set back from Marsha's illness, that they were spending an extraordinary amount of their income on servicing their debt, including high-interest credit card debt. In fact, they were paying $1,260 per month with interest rates as high as 20.24%.Their total credit card and personal debt, not including their mortgage or automobile loans, is about $53,000. (By way of contrast, the Employee Benefit Research Institute recently noted that the median amount (mid-point, half above and half below) owed by all families having credit card debt increased to $3,000 in 2007, up from $2,197 (in 2007 dollars) in 2004, up almost 37 percent.)
In David's case, we asked that he stop using his debit card for expenses and gave him a monthly allowance for out-of-pocket expenses. We do this not just for David but for others in this situation for the following reasons: There's no way to get to the future and saving for retirement with significant consumer debt on our balance sheet. First there must be a plan to pay off the debt and start saving the equivalent of those high interest rates.
