Cash Flow Equation

The cash flow equation is the foundation of personal finance. It's a simple but powerful concept that governs how money moves through your financial life.

The Basic Equation

The general basic equations is:

Income + Withdrawals = Expenses + Taxes + Savings

During the Accumulation Phase, you generally do not need withdrawals and during the Distribution Phase, you generally do not have savings (unless large RMD amounts exceed expenses + taxes and result in savings)

Understanding Each Component

Income

All money that flows into your accounts from various sources:

• Salary and wages
• Business income
• Investment returns
• Rental income
• Other sources

Expenses

All money that flows out of your accounts:

• Fixed expenses (rent, insurance, loan payments)
• Variable expenses (groceries, utilities, entertainment)
• Discretionary expenses (dining out, hobbies, travel)

Taxes

All money that flows out of your accounts:

• Federal government (federal, social security and medicare, capital gains taxes)
• State governments (state, sales tax)
• County (local, real estate taxes, personal property taxes, etc.)

Savings

The difference between income and expenses:

• Positive savings = building wealth
• Negative savings = accumulating debt

The cash flow equation is more than a simple calculation—it is the cornerstone of a successful financial plan. By reconciling income against expenses and taxes, this equation illustrates exactly how your net worth changes over time. The goal is simple: optimize your cash flow to accelerate financial independence and secure a comfortable retirement. In the following sections, you will discover how the LCF Planner streamlines this process - empowering you to track spending, automate tax calculations, and identify strategic opportunities to maximize your long-term wealth.