I often talk about the importance of getting a handle on cash flow, which is the income you have coming in and where it goes. Getting a handle on your cash flow is the foundation of taking control of your finances.
The image below shows how there are different things that will compete for your income each month (or pay period). Do you have structure around how your income is getting allocated and is it marching you toward your financial goals?
On the left side of the image you’ll see part of your income will go into typical monthly expenses like housing, food, transportation. Some of these expenses will be fixed and some you will have control over. The next bucket is Taxes, which are usually everyone’s least favorite place to distribute their income to.
Next, you may have a couple of financial goals that you are heading towards. Some examples include Retirement, planning for a child’s College Education, purchasing Real Estate (whether it is a new personal residence or investment property), or generating a stream of passive income. Each goal will have a cost to it. For example, if you want to retire with assets that can generate $100,000 a year in income you may have to save $10,000 a year into a retirement fund from ages 25 to 60.
The last two buckets on the image relate to preparing for a catastrophe. One way to do this is having an Emergency fund to ensure there is enough liquidity with your assets so that you can withstand things like a medical emergency, job loss, or a large home maintenance cost. The Paycheck Protection bucket represents having insurance in place should your paycheck go away because of death or disability.
Everyone will have different buckets on where they want their money to go. The approach I like to take is to first determine what it costs to fund each bucket. Then look at the income being generated and determine if it is enough to fully fund all of the buckets. If it is enough to fund everything that’s great. The final step is to execute and ensure that each month your income is getting allocated to the proper place. The more of the allocation you can automate the better. If your income is not enough to fully fund everything the next step would be to prioritize the buckets to ensure the most important ones are getting funded and put together a plan on the ones that cannot be fully funded.
Where is Your Money Going?
