The process is a lot like putting a puzzle together.
When my kids were growing up, many days my wife would sit with them on the floor putting puzzles together. They would laugh and talk as they worked together arranging the pieces to create the picture on the box.
When the kids were young, the puzzles consisted of 20 pieces that could be put together without much need for the picture on the box. The older the kids got, the more complex the puzzles became and the more important the picture became for them to fully study, understand and refer back to in order to complete the puzzle.
The same is true for a financial plan. When someone is just getting started with his or her financial life, the process can seem rudimentary without much consideration. However, as assets are accumulated and life becomes more complex, the picture on the box becomes the most important part of assembling the puzzle.
The Importance of the Picture on the Box
Think of your personal financial situation as a puzzle made up of dozens of pieces. The pieces represent all of the products, programs, thoughts, decisions, purchases, ideas, investments and anything else involving your financial life.
The picture on the box to your puzzle is your CASH FLOW. It’s where everything flows from and where everything originates. It’s where the most important decisions are made and is the most important aspect of planning to understand. You simply cannot fully put the puzzle together without the picture.
Yet, most people work around the edges of their puzzle and don’t take the time to study the picture. People will spend their time talking and debating about the pieces without considering the picture on the box. It’s similar to what often happens during financial or retirement planning. Instead of working to fulfill the picture on the box, focusing on the completion of the puzzle rather than the individual pieces, they go from one idea or adviser to the next focused on products and rates of return. The puzzle is never complete.
What is cash flow?
Cash flow is understanding where money originates. It’s about strategically using money to not only live your life but to create more income sources for yourself. When you put your focus on cash flow, it solves a hundred other decisions.
The confusing part about cash flow is that too few people understand what this really is. They believe that a monthly budget represents their cash flow. It doesn’t.
A budget is used to track expenses. It focuses on limiting them to stay within your means in order to save money. It is a mindset of scarcity and is like using a rearview mirror for managing money. A budget is merely a piece of your puzzle.
Cash flow is the picture. It focuses on where your money needs to go to fulfill the goals that you have for your future. It is like looking through a windshield to see where you are going and allows you to direct money toward creating wealth and ultimately more income. It is an abundance mindset, not a scarcity mindset.
The purpose of cash flow awareness is not simply to make ends meet, but rather to properly organize the flow of money, which allows you to create wealth and avoid debt.
How to Build a Plan Based on Cash Flow
Developing the picture on the box and assembling the pieces is a fairly straightforward process. It doesn’t require a great deal of time if you follow a few basic steps. When you think of your cash flow, break down your annual expenses into five groupings:
- Debt payments
- Tax payments
- Regular monthly expenses
- Savings and insurance transactions
- Irregular expenses throughout the year
Then list in chronological order the big-ticket items you plan to spend money on in chunks over the next five to 10 years. (This would include education, transportation, home improvements, etc.)
It is important to include the assets you plan to purchase or invest in to create more income on this list. This may be a business, rental property or some other income-producing asset you plan to acquire.
During this stage of the process, don’t think about how you will pay for these big-ticket items, just list what they are, and then circle back later to strategize as part of a financial planning process to work out the details. Take a few minutes to complete this exercise. Once you do, you’ll discover whether your current cash flow is in alignment with your plans or if adjustments need to be made.
Defining your intention for the money you have allows you to begin assembling your financial plan in a strategic, chronological manner to seek opportunities for developing new income sources. The goal is to ultimately generate enough income from your assets to satisfy these big-ticket purchases and support your entire lifestyle.
That is how financial independence is achieved.