Adjusting cash-flow plans for financial windfalls

Most people hear the term cash-flow planning and think of budgeting, or circumstances in which a client is having financial troubles. In fact, this kind of planning is designed to maximize cash-flow regardless of the scenario, and to do so in a manner compatible with human behaviour. It’s just as useful in the case of a windfall.

Many clients will have a fortunate experience at least once in their lives. Your clients may find their bank accounts flush when they receive an inheritance, sell a rental or recreational property, sell a vehicle, receive a retirement allowance, cash out stock options from work or even downsize their primary residence. They might even win the lottery.

So how would you adjust a cash-flow plan to make the most of a bit of good luck? It depends on the client’s financial situation, as well as the windfall itself. Let’s explore four ways you can adjust a client’s cash-flow plan.

1. Separate that cash quickly

Clients may wait to decide what to do with extra money and leave it in a bank account used for regular spending. Before they know it, those funds can leak out one tap at a time.

Rule 1 with any type of windfall or cash influx is to get it in a separate account as quickly as possible, preferably one without a debit card attached to it.

If your client is already following a cash-flow plan, they should have two short-term savings accounts: one for emergencies and one for short-term goals. Either of those can be a great temporary place to stash that cash. Thinking needs to take place before spending or investing does.

2. Carve out the no-accountability money first

After accounting for any taxes related to the new funds, work with your client to determine an amount of the windfall that they’d like to spend, no questions asked. Help your clients consider the consequences of their choices by showing them the impact of putting those same funds into their plan.

The idea isn’t to discourage frivolous spending — they should feel free to treat themselves. But you can help minimize the related risks by showing them the long-term results of their choices.

Doing this can help them spend some of the money guilt-free. It can also get two spouses onto the same page, so they both support the plan instead of inadvertently sabotaging it.

3. Use the cash-flow plan

After taxes and carving out some free-spending money, there are ways to feed the cash to the cash-flow plan. For smaller amounts, test putting funds to work within their current strategy.

If they have $1,500 per month of free cash-flow, and $500 went to their TFSA each month, see how that performs. Compare that to how long it would take without the adjustment.

For some clients, time will be more valuable and they’ll prefer to invest the money so they can stop working sooner. Others might want to balance upgrading their lifestyle with their original plan. Help them compare options.

4. Communicate windfall what-ifs

Too often, clients want to use some of their windfall before coming to their advisor. Before they know it, they’ve burned through a significant amount.

Don’t wait for clients to tell you about a windfall or influx. During regular reviews, mention the various things that could happen in their financial life where they should reach out to you before acting. Windfalls should be on that list.

Make sure they realize that one of the steps is carving out some of the extra money for fun. The reason people hesitate to tell their advisors about unexpected cash is that they don’t want you to take it all away. You can be proactive, and make sure they know that you’re not a buzzkill.

Pre-existing cash-flow plans make it easier

It’s easier to help a client direct a windfall if they’re already following a cash-flow plan. They’ll be more familiar with the fact that the plan will ensure they still have fun with their money. And they’ll be more used to putting their money to work effectively.

Don’t let your clients lose out on maximizing their future financial windfalls. Start making these what-if discussions and cash-flow planning part of your regular process.