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Another important document needed is a statement of cash flow. The cash flow statement typically reflects a household's annual income less its discretionary and non-discretionary expenses. Income minus expenses is what financial planners call net cash flow. Positive net cash flow is good because it can create savings and financial security. Negative net cash flow is bad as it creates debt and/or erodes savings. Beth and Lisa have, at the time of this analysis, negative net cash flow. However, with some budget work, they are able to cut back on some discretionary expenses, such as dining out and reduced bills from consolidating households, to achieve a break-even cash flow.

When it comes to creating a budget it's important to understand that there are two kinds of expenses; discretionary and non-discretionary. Discretionary expenses are typically non-essential expenses that can be avoided or trimmed. Non-discretionary or fixed expenses can be changed in some cases, but they must always be paid. Typically, non-discretionary expenses include a mortgage, taxes, minimum debt-service payments and the like. Lisa and Beth spend an unsustainable amount of their income on servicing their debt, including high-interest credit card debt. In fact, they are paying $1,200 per month on credit card debt with interest rates as high as 23 percent. They are also paying another $1,490 per month on auto loans. Their total consumer debt is approximately $140,000 (of which close to $97,000 is in auto loans and balance is mostly credit cards).

Lisa and Beth recognize that they will struggle to achieve their financial goals if they can’t create positive cash flow and reduce the head wind their debt payments represent. They have worked on their budget and cut down some of their discretionary spending. They also have put a priority on paying off their credit card debt and, as of this writing, have already been able to pay off some of their smaller credit cards with the highest interest rates. 

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