Money Talk

Episode 44

Cash In-Cash Out Statement

Your checking account really is the cash-in and cash-out statement. This will be fun, I can assure you — like a barrel of monkeys kind of fun. There are all kinds of solutions for charitable estate planning. The secret is the accumulation of wealth is the game. The disposition of wealth is the disaster.

Welcome to our listener-supported podcast, Money Talk. Uncompromised, absolute financial truths behind financial perceptions with hosts, Ed Sutkowski and Chuck LeFebvre. Let’s listen in.

Chuck: This is Chuck.

Ed: And I’m Ed.

Chuck: This is Money Talk.

Ed: Today’s topic is the Cash In and Cash Out Statement.

Chuck: All right, Ed, I’m excited to hear what this is.

Ed: When you apply for a mortgage, you’re going to buy a home, that’s your balance sheet, and your tax return shows you where all the money went.

Chuck: Right and came from.

Ed: And came from.

Chuck: Right.

Ed: Your checking account is really the cash in and cash out statement. I think it’s imperative that you think about doing this frequently. Some folks do it every month, some every quarter, some every year, but the point is, you’re not going to have a handle on your assets and income and cash without doing it. By the way, you’ve got to do it yourself. Do not go to a computerized cash flow statement.

Chuck: Oh my gosh. Goodness, no. I can’t imagine how difficult that would be.

Ed: Because we’re not looking at something precise. The opportunity here is the acceptable state of imperfection. Just so you understand this.

Chuck: Right.

Ed: And you’re going to have to do it several times, but pencil and paper, if you get an 8-column pad, that’s great, but just a sheet of paper. List on one sheet of paper, your assets, for example. You’re starting with cash, in the beginning of the year, and you’re listing your home, and maybe you’ve got a 401K plan or your savings account, and your W2.

You’re listing all those assets that you have. Then you’ll extend how much cash is being received in respect of each of those assets. Now, your house, you’re not getting anything, but you’re going to list it, because I’ll show you. On your disbursement side of the ledger, you’re going to show that house. And you got real estate taxes you got to pay. You got interest on your mortgage and then at the very bottom, you’ve got federal and if any, federal and state income taxes.

Chuck: Right.


Ed: At the end of the day, you will see what you got in the way of cash and what you’ve sent out in the way of cash.

Chuck: It’s item by item? For instance, you’re talking about, you can look at how much, for example, your house is costing you. How much your boat, if you have a boat, is costing you. What about when you take money, and you move it? For instance, you contribute money to a 401K plan, do you log that in here as an expense?

Ed: You show on the disbursement.

Chuck: Okay, you show it as a disbursement from the checking account.

Ed: Yes.

Chuck: But it’s income, or receipt to the-

Ed: Yes, you’ve got your 401K contribution that you’ve made. Your company matches it. That’s a receipt.

Chuck: Right.

Ed: Now, this isn’t necessarily show you how much cash you have in the bank, it’s what cash you “received and constructively received.” You got a 401k contribution, a match or whatever.

Chuck: Right.

Ed: And then on the other side of the ledger in your disbursements, you’re going to show, if I had to match, I put some money in.

Chuck: Right.

Ed: By doing this, you’re going to understand the operation, the 401k plan, the IRA, your interest on your home mortgage, your interest on your trailer loan.

You can see at the end of the day, what cash you have left, if any. And what do you satisfy that, you’re going to have to show a receipt from the bank. You’re going to show a loan as a method of receiving cash. Then you’re going to show on the other side, the amount that you paid down on your loan.

Chuck: Right.

Ed: It’s very intuitive. You just kind of think about all those assets and where you’re getting the money from, maybe an income tax refund from the government. It’ll be fun. I can assure you; you will find this to be like a barrel of monkeys.

Chuck: As you know, I’ve done this quite a few times when I do trust accounting, is the kind of a format that’s used as a summary on that. You list each asset, and you have the value at the beginning, and then you show any income that was– For instance, let’s say you’ve got stock in a company like IBM that pays a dividend, where you show the dividends you’ve received on that.

I don’t think an individual would need to be that detailed down to each stock, but for instance, you have this asset, and you show how much income that asset produced in one column, and then you show any expenses that were incurred relating to that asset in another column–

Ed: Yes, but remember, you’re getting a brokerage statement. They have securities.

Chuck: Right.

Ed: So, every month you get the brokerage statement.

Chuck: Right.

Ed: That’ll show the dividends received, mortgages paid.

Chuck: Right, but as an individual, you don’t necessarily need to go and look and log this for each individual holding on that brokerage statement. You can just say, “Well, this is my investment account, I got this much in dividends.

Ed: Exactly right.

Chuck: This is how much was paid in fees to the brokerage firm.”

Ed: To the lawyer, to the accountant.

Chuck: Right. Then at the end of the day, if you want, you can add a column in there that shows change in value, so that you can–

Ed: Let’s back up. Are we really talking about a balance sheet there? I’m talking about… I agree with what you said, but part of this is you’ve done a year-end financial statement. That’s your mortgage application, but you’re putting into your form.

Chuck: Right.

Ed: You’re going to show assets and the nature of the assets, real estate, whatever. That’s your balance sheet.

Chuck: Right.

Ed: And some people update that every month or every- you should do it every quarter, I think. But you should do it! Don’t send it to an accountant or a lawyer. You should do it!

Chuck: You won’t be able to read it if you send it to them. It’ll come back in a form that they understand, but you don’t.

Ed: With all these disclaimers.

Chuck: Right. Right.

Ed: Wait a minute. We’re not going to jail for this. This is something you should be doing. You’re doing a balance sheet at the end of each year, may be at the end of each quarter, and sorry, at the end of the year. Then you have this cash flow. This cash in and cash out. You want to do that frequently, but you’ve got to do it yourself.

Chuck: Right.

Ed: It sets up that socratic approach. You’re realizing it yourself.

Chuck: Right.

Ed: Without someone telling you. You’re going to make all kinds of mistakes, trust me. That’s the beauty. “Oh, that doesn’t sound right.” You can look it up on the internet, cash flow statement. And you can get some tips, but you’ve got to do it yourself!

Chuck: Right. But I think what you’re suggesting here, that’s different than what you’re going to find if you look on the internet. Is you’re suggesting that you’re kind of keeping track of this by each, for instance, you’re keeping track of your house separate from other things?

Ed: Yes.

Chuck: It’s not just global cash flow, but you’re kind of tracking, how much did you make and how much did you spend with respect to each of your major holdings, your house, your car, your investment account, your IRA, 401k, that kind of thing, so that you can see where money’s coming from and where it’s going to.

Ed: You can suggest to your spouse or your significant other, “Look, I’m not sure we want to buy this camper, but maybe we should buy the camper. We got enough assets and a way to do this, but what’s it going to cost us to do it?” This deferral of self-gratification. We’re going to put all this money away for retirement. Well, what happens if you die before that? There is this recurring issue of how much do you want to defer? How much do you want to spend, but that’s for another day.

Chuck: Right.

Ed: The point is, just know what’s going on here.

Chuck: Right.

Ed: Then the next level is once you’ve done it on an annual basis, do it by quarter. Then you’ll see exactly what’s going in by quarter. If you have liabilities, debts to manage, your banker will want to adopt you. Because your banker is going to see, “Oh, yes, this is the way the money’s coming in and this is way it’s coming out. Pete, I’ve never seen anything like this, and we can loan you some more money.” But be careful because of the bankers. Bankers have a business of doing what?

Chuck: Loaning money. Charging interest.

Ed: Anyway.

Chuck: I should probably mention that this is easier than people might think it sounds based on our description. Especially if you don’t try to make this accurate to the penny. Right. You’re looking for broad strokes. You want to know roughly what’s coming in and what’s going out. You can spin your wheels and put a lot of time into this when you’re trying to get everything matched down to the penny, but o then the first try, you can do this using rough numbers and then as you develop familiarity with the process, then you’re spending less time with the process.

It becomes a little more effortless to say, “Well, wait a minute, I think I’ll look this up and make sure I understand, this is what’s really going on.

Ed: That’s right.

Chuck: I’m not going to guess this time around.” You get better and better at it.

Ed: Be careful because the different assets generate cash at different tax characteristics.

Chuck: Right.

Ed: You get an IRA distribution that’s typically ordinary income, that’s subject to self-employment tax, maybe it’s not taxable for Illinois or state purposes. You’ve got that issue, versus a capital gain. Is it short or long-term? Forget about all that stuff.

Chuck: Right.

Ed: It’s just how much cash did you get in and how much cash is going out. You can roughly estimate your tax by using last year’s number.

Chuck: Right.

Ed: But I, precision is an evil here.

Chuck: Right.

Ed: Now, the accountants will castigate us which they usually do anyway, so what? The point is, don’t get confused because when you have the accountant. Now some of the listeners will be accountants and I understand that. They’re good people. We’re not saying that, but–

Chuck: Former listeners. Some of the former listeners will be accountants.

Ed: Yes, but there are a lot of people that are coming to my funeral only to be sure that I’m dead. But, that’s okay, I’m living a good life. Having said that, we’re looking for an acceptable state of imperfection.

Chuck: Yes.

Ed: Not perfection. As the years roll by, you’ll get better at it.

Chuck: Yes. Now here’s the question, Ed. Someone listening says, “Okay, but how does this help me? What’s the benefit here? What do I get out of this?”

Ed: Managing debt.

Chuck: Okay.

Ed: You could have a gazillion, you could have $60 million in debt, but if you know, and the banker knows where your interest is coming from, where you’re going to make payments and that sort of thing, you’ll feel good about where you are financially.

Chuck: Right.

Ed: Now, let’s talk about a financial planner. Any observations about the need of a financial planner, Chuck?

Chuck: Well, they would be very gleeful about gathering the information from you to put this together and help you put this together, but then, if you said, “I wanted to do this in order to manage debt,” they would say, “Oh my goodness, no.” Right? I mean…

Ed: No debt.

Chuck: No debt. Yes, I’m not sure involving a financial planner in this process, it might defeat the whole purpose. It seems like, really, the purpose here is for you, personally, to go through the process and get your own mind wrapped around what those numbers are.

Ed: Yes. Let’s talk about debt for a minute here. I’m not talking about installment loan debt. I’m not talking about credit card debt with exorbitant rates. I’m talking about debt associated with an investment.

Chuck: Right.

Ed: You buy an apartment building. There is debt associated with this. You’re going to get rents in, you have taxes out, interest out. That’s the kind of debt I’m talking about.

Chuck: Right.

Ed: Not consumer finance debt. Pay that off. Never have consumer finance. I guess you’d never say never, but I just did.

Chuck: Right. Yes. The idea is understanding when and how much you can afford to go into debt in order to make an investment, or to sustain an existing investment, not in order to purchase something that is not an investment. Is that a fair way of saying it?

Ed: Yes, house, I’m not sure house is an investment, but no one’s going to believe me on that one.

Chuck: No, I believe you on that one, that’s always been my view. It is and it isn’t. The house is, it’s not a performing investment, I guess is the way I would look at it. Because people will sometimes look at the fact that they have a house and they say, I’ve got this big investment in, in my house, when in fact that’s not something that you can ever really afford to convert into anything else right?

Ed: Yes.

Chuck: That’s the problem with the house as an investment is that, throughout your entire life, you will need a place to live. You might sell your house, but you’ll have to buy a new house, right?

Ed: Or rent.

Chuck: Or rent, which is essentially the same type of cash flow that’s associated with owning a house. It’s not an investment that can be traded out for something else. It’s something that can only be traded out for another version of itself.

Ed: You’ve got some exclusions from any capital gain and that sort of thing with the house.

Chuck: Right.

Ed: A recent Wall Street Journal article talked about not downsizing, but upsizing. That folks that are old, age 65, that are really old, they go ahead and not only do they sell their current home, but they buy a bigger one and they would have then an apartment or a condo in Florida. I don’t want to say Florida, you got to have rocks in your head to go to Florida, but that’s okay. That’s a personal view. But we’re talking about a good state

Chuck: Right.

Ed: You can talk about Arizona, Texas, certainly not California, but anyway, in a state that you’re gonna have fun. You’re going to meet some people, but you’ll have maybe a condo there.

Chuck: Right.

Ed: But your favorite home, your big home is larger now.

Chuck: Right.

Ed: Because you’re going to spend some of the money that you’ve earned.

Chuck: Right.

Ed: You’re not going to take it with you!

Chuck: Right.

Ed: Although, we have some folks that seem to think that that can be done.

Chuck: Right. Then again, getting back to this other concept here, you can do that. You can decide, I’m going to treat myself by getting a bigger house, but then this gets back to them what we were just talking about the house as an investment. Don’t trick yourself into thinking that you’re doing that as an investment.

Ed: Oh, it’s not.

Chuck: You’re doing that as an expenditure.

Ed: That’s right.

Chuck: You’re spoiling yourself.

Ed: That’s right.

Chuck: You’re entitled to spoil yourself if you want to, but don’t tell yourself it’s an investment, because it’s not.

Ed: No, it’s not. It’s a fun thing. I’ve seen some people pouring a lot of money into the larger home and why? We’re enjoying it. We don’t have a bus. I get these RVs that are a quarter-million dollars for a recreational vehicle. I’m thinking, what are you doing? We like to travel.

Chuck: Right.

Ed: Fine, but this deferral of self-gratification which is my theme. Then the question I have to ask myself is why the hell are you deferring it? Why don’t you spend it? Well, because it’s a game.

Chuck: Yes. For you, right?

Ed: Well, I think for most people, if you do this cash flow statement, you will find that it’s fun. Wow. Yes. If I do this, I’ll maybe, this will happen.

Chuck: Right.

Ed: And I can maybe make some gifts to the grandchildren, pay their tuition. I pay their medical bills and pay some charitable– because this is fun, because I’m accumulating it, so I can dispose of it in a way of having fun. Making someone’s life better.

Chuck: Yes.

Ed: The process is fun, but then the end result is yes, I can do some good things with it!

Chuck: Right.

Ed: But that whole different issue is a good charity. I don’t know about your experiences, but I think there’s some charities that are not real well run, I could say that.

Chuck: Yes, and I think that I found that if people wait until they’re engaged in their estate planning, which typically is later in life for many people before they’re engaging in estate planning of the type where they’re starting to think about incorporating charitable giving in that. This has happened many times where you sit down with people and you say, “What about charitable giving? Is that something you’re interested in doing?” “Oh yes, it is. It’s something I’m– I want to be charitable,” but they don’t actually have a relationship with any charity that they ever get to the comfort level that you would need in order to include that charity as part of your estate plan. I think I would encourage people that, what you really want to do throughout your life, not make huge contributions if you’re unfamiliar, but make smaller contributions to different charities and get to know them. Right?

Ed: Precisely. Get to know the charities.

Chuck: Because you’ll figure out, and don’t just pick one, but spread some money around to different ones, get to know them all. You’ll start figuring out which ones you really respect, which ones seem to not actually be doing much, which ones are aligned with your values and which ones aren’t. Then later in life, when you sit down with a lawyer and you’re talking about estate planning, they say, “You’re interested in charitable giving,” and you say, “Oh yes, because I’m a charitable person. I really want to make sure that I include some charities in my estate plan.” Then the follow-up question is, “Okay, who?” You’ve got an idea in mind about one or more organizations that you’ve developed enough respect for, that you have a genuine interest in benefiting them as part of your estate plan, right?

Ed: There are all kinds of solutions, Chuck. The identification of the correct charity or charities is a monumental task. This is after you’ve done this cash in and cash out, you updated your balance sheet, and you’ve got enough money to take care of yourself for the rest of your years. You have outlived your life, so to speak. You’re not doing anything really productive, but you’re going to be productive. You’re thinking about how you’re going to give this money away.

Chuck: Right.

Ed: You could do it either outright through a donor-advised fund which we’ve talked about, or through a private foundation. Do your own fund. You could always form one of those puppies online. Then you empower your descendants as directors of the foundation to decide to dribble out the money to the various charities.

Chuck: Right.

Ed: They can monitor.

Chuck: Think about, Ed, the number of times that you’ve seen this. I know I have too, where people do that. They’ll create a private foundation, or they’ll create a donor advised fund as part of their estate plan. They’ll put a bunch of money in there and then the kids can direct which charitable organizations these go to after I die. That’s great. What they want is to encourage their kids to be charitable. On the other hand, it’s an acknowledgement that, I never really figured out who I want to give this money to. Right?

Ed: So, they lay it off on someone else.

Chuck: I’m going to lay this off on my kids. Sometimes that works out really well. I can think of a couple of families where these foundations have really done exactly what was intended. I can think of a lot more examples where the kids are like, why didn’t you just give me the money?

Ed: We’ll get into that our next topic, but I want to address your issue. One way of doing it is putting a letter of intent or guidelines that you’ve tailored during your lifetime of the 5% annual distribution of the foundation. To speak, I want such and such to go to X, Y, and Z. Now I’ve had a situation where there are two brothers and I wanted to go to A, no, I want to go with the B.

What you say, “Look, it’s 5%. It’s run at 6% that year you’re going to distribute. Pete, you get 3% you can decide what to do. John, you get 3%, you can decide what to do. That works out pretty well.

Chuck: Right.

Ed: They decide which charities.

Chuck: Right.

Ed: The secret is the accumulation of wealth is the game. The disposition of wealth is the disaster, I would say.

Chuck: Right.

Ed: I find people tend not to want to give too much away during their lifetime, but don’t want the kids to get too much during their lifetime.

We’ll get to that in our next session. I find this an amazingly difficult process. Any number of folks that I’ve worked with clients that will say, “Ed, you know, this accumulation thing is just a lot of fun. Giving away is a pain in the ass.”

Chuck: Right.

Ed: Has that been something you’ve encountered?

Chuck: Yes, I think it’s always a thorn in your– Not always, but there’s some, plenty of people out there who just, “Well, goes to my kids,” and they never really give that much more thought than that. For the folks who really have a desire to generate something that you would refer to as a legacy, they have a very difficult time figuring out what that looks like.

Ed: One aspect of it that I found amazingly appropriate. This, we’ll call him Charlie and not you Chuck. But if Charlie never married, no children, nieces, nephews, lots of friends, and everyone knew that Charlie had a couple bucks. He had a nice house, always dressed to the nines and had his shoes shined. This guy’s got some money. He was an entrepreneur. He manufactured widgets or something. Charlie said to his lawyer Pete, “All these people are really nice, but I think they’re hanging around just to wait till I die. What we’re going to do here, Pete, you are going to be my agent. And I’m going to be buried at a location that’s 150 miles away from the town I died in. Everyone that comes to my burial, gets $15,000.” Pete said, “Are you serious, Charlie?” Charlie says, “Yes, then we’re going to modify to do some other things. And those people that really cared about me are going to get more. It’s up to you to figure out how we’re going to do that.

Chuck: Right.

Ed: I want to reward people who really thought well of me, not because I have. And by the way, Pete, you know much money I have here, and it’s a lot of money, but I’ve got to identify people who really cared about me without regard to my money.”

Chuck: Right.

Ed: Chuck, let’s implement that plan. It’s an amazing experience. I think that’s about it for today and our next topic will explore this in a little more detail.

Chuck: Sounds good.

Thank you for listening to Money Talk. Please join us again and do check out our previous Money Talk topics.

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