Just like life, your financial journey has a lot of milestones and transitions along the way. Generally, your journey can be broken down into stages and is often categorized by your needs, goals, and risk profile. Those can be very different depending on what stage you are in.
The midpoint of your career is an especially important time. It usually corresponds to an increased cash flow, and hopefully, some visibility into your likely future earnings trajectory. A high cash flow usually means more responsibilities too. These may include homeownership, creating a family, saving for kids' education, and increasing retirement savings. Of course, a higher income also means higher taxes.
At this point, you are starting to accumulate enough money and assets that mistakes and missed opportunities can be costly over the long run. Creating a flexible financial plan can be the foundation that helps protect your family, grows your assets, and minimizes taxes is the foundation of building wealth. It starts with mapping out your cash flows.
Understanding the Planning Mindset
Let's be real. You can't convince me that there is a single person that enjoys budgeting. Many people believe budgeting is only about keeping spending in check, with almost a scarcity mindset. It’s essential, though, as it ties into cash flow planning, which is about choices and expands far beyond the initial budget.
While it's not exciting, cash flow should be the foundation of your financial plan. Instead of budgeting, think of it as a plan to achieve your financial goals. Accomplishing your goals should stir more emotion than "budgeting." Not only does it help you identify future income and expenses, but it can also help you articulate your big-ticket goals and, more importantly, define a path to be able to achieve them. Once you have your plan in place, it can also help dictate changes across all aspects of your financial actions, making the result worthwhile. Good planning helps ensure you are realistic about return opportunities and gets you thinking big picture, including minimizing taxes and protecting your assets.
Getting Into the Process and Tactics
Income minus expenses equal cash flow. It's as simple as that.
START WITH YOUR INCOME
This means monthly net income after taxes, across all sources, including salary, rental income, reliable investment income, etc.
IDENTIFY YOUR EXPENSES
These usually break down as follows:
- Debt including credit cards, leases, mortgage payments, and loans (personal, education, etc.)
- Taxes except for payroll taxes, which are already deducted when calculating net income
- Basic monthly expenses: Rent, food, gas, cable, phone, etc.
- Discretionary expenses: Dinners, trips, purchases
- Savings: Cash reserve savings, retirement or education savings, big-purchase savings
- Insurance costs: Home, health, professional liability, auto, a potential umbrella policy
- Extraordinary expenses: Anything out of the norm – vet bill, car repair, etc. To get a realistic annual figure, average the last three years of your extraordinary expenses.
SET CLEAR GOALS
Spend some time identifying both short- and long-term goals over a 5-10 year time horizon and then assign spending targets to them. These could be education savings, a second home, home improvements, early retirement, starting your own business, etc.
Developing and working towards goals is the essence of cash flow planning. While budgeting operates from a scarcity mindset of cutting expenses, cash flow planning opens up the horizon to allow you to see clearly where you are now, where you want to go and sets the path for you to get there.
The purpose of identifying short-term and long-term goals is that the ends to achieve them are different.
Deploying Your Cash Flow Planning Strategy
The planning part links your cash flow to your future expenses to help you achieve your goals. Different strategies are devised for each to guide better results. When done correctly, it can uncover gaps in your financial plan. For example:
- Are you taking enough investment risk with your investments, whether in your retirement or taxable accounts?
- Should you refinance debt?
- Are you saving enough for retirement?
- Are you minimizing your taxes through tax-advantaged saving vehicles like health spending accounts and 529 plans?
- Should you diversify your income stream or invest in more tax-efficient sources of income, such as real estate?
Sorry, but this isn't a one-and-done process. When deploying your cash flow planning strategy, it's important to do check-ins against your goals and tactics to monitor how things are going and adjust as need be. As part of your cash planning review, we recommend looking at ways to automate as much as possible. Getting the right systems in place can help ensure you hit savings goals and save as much as possible for retirement.
As your financial journey unfolds, it's important to ensure that it keeps up with your life. Inevitably your goals will evolve as you change and grow, and your resources often increase. Ensuring that your planning matches your life stage is critical to increasing wealth and staying on track as you move forward. If you need help with your financial plan, give us a call or email us at email@example.com.
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