Income Planning: Cash is King
It is now Day 172 of work from home. The latest edition of creative play has been “book store”. That means the kids pull out their play cash register, collect some toys and books and set up shop. The next step is to find the numbers stencil, steal some sticky notes from dad and make price tags. It is all very professionally done.
Mom and Dad are funneled through a door, told to make our selections and then we check out at the counter (their small table which holds the register).
It feels like I’ve shopped at this bookstore hundreds of times, and each time I learn an important lesson. I spend way more than I think. I’m not sure who’s doing their pricing but a couple of toys and some books is magically $79. Oh, wow!
Of course, it is pretend and fun but the real world isn’t much different. Ever go into Target planning to buy new socks and leave with $150 of who-knows-what? It shouldn’t be “Target run and done” it should be “Target run and broke”.
The problem with overspending, whether at my kid’s fake bookstore or during a real-life target run, is the damage it can do you your future. We’re forking over cash we likely need in the future for stuff we don’t need today.
Seriously, and unfortunately, income planning is all about expense management and then savings and then investing. It is the way to financial freedom and building a secure future.
Cash is king.
It takes savings and investing to build net worth. A high income may be great, but unless you pay yourself by saving into long-term accounts, you may not amass enough wealth to support yourself in the future. It’s not about how much you make, it’s about how much you keep.
The solution to making you the king of your situation: budgeting. Yes, budgeting is no fun, it’s tedious and if you’re a big spender, it’s awful to look your mistakes. Remember those Target receipts? That happens more frequently than I’d like to admit.
Nevertheless, good cash flow management is all about budgeting.
The essence of income planning is budgeting and budgeting means making sure you don’t live above your means. I’m not saying you need to budget to the point that you know where every penny goes every month. No one is going to be the hit at a party if they tell people they spent $45.27 on latte’s in August. I’m saying that watching your expenses from a budgeting point of view helps you build awareness. It is also critical for good retirement planning.
When you’re aware of where your hard-earned dollars are going, you’re more likely to make sure your cash works for you. Having a sense of your expenses and a handle on your budget is instrumental is making a financial plan to meet your goals.
To sum, income planning is budgeting, but more importantly it’s awareness. Cash is king, so don’t spent it all, keep some for yourself by saving every week, month, or year and investing it. Paying yourself first.
As example, take two fictional characters: Tiffany and Kimberly. They both make $50,000 per year, will retire at age 65, and invest in a total stock market index fund. The difference is Tiffany was diligent about watching her expenses and was able to start saving 10% of her income at age 25. Kimberly, conversely, liked expensive cars and rather than save 10% leased a BMW. She didn’t start saving her 10% until age 40.
$2,000,000 is a lot of money. At age 65, and when it comes time to support themselves in retirement, Tiffany is in a much better position to live the life she wants. Her disciplined annual saving and investing routine helped her build enough wealth to see her through retirement. This is compounded growth in action and you need time to make it work.
Being consistent reaps big rewards in the future. That’s because the money you save and invest today will grow into the money you’ll spend tomorrow. Income planning and budgeting is the bridge we cross to make sure our hard-earned money works hard for us.
So, think about where your dollars are spent. Having awareness of lifestyle costs helps the planning process and allows us to triangulate whether or not you're on track to make your retirement goals. Certainly, have fun, money only has utility when it's is spent. The point is money doesn't grow on trees and you can either be in control of your expenses or they can be in control of you.
Cash is king and if you want to write the rules of your retirement, make sure you have enough of it.
Adam K. Wright, CFA, CFP®
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