Cash Flow Model
Of all the things you must learn to manage in your life, Cash Flow may be the most difficult. Savings & investing takes effort. It takes discipline. Some people even consider it painful. There are two types of pain. The pain of discipline and the pain of regret. Learn the answer to some critical questions now, so that you will know how to prepare for your golden years. What you don’t know can hurt you.
The personal economic cash flow model will give you a visual, a picture of how money flows. This video you’re about to see is designed to view your money from perhaps a different perspective than you have ever seen it before.
What you learn may help you to increase the overall efficiency of how you manage a very important part of your financial life called cash flow. Let’s begin by looking at a picture that will help you visualize the process. This tank represents the potential income that will pass through your hands during your working years. For most of us, the major source of cash flow usually comes from earnings through our occupation.
Some of us may be fortunate enough to receive an inheritance. Your lifetime income potential represents an estimate of the amount of money that will flow through your hands during your earning years. It’s just an estimate designed for you to see that it is quite a large amount of money.
Suppose you’re 42 you want to retire at 65 you’re making $102,000 a year. Today there is a 3% inflation rate. You already have $88,000 saved and you think you can average 6% your income potential would be $3,310,194 your wealth potential represents the amount you would have if you could invest every dollar you earned until your retirement, which obviously you can’t do if you were given a check equal to your income potential on the first day you started working and were told, this is all you will ever receive.
You would no doubt look at your money differently than you do your smaller weekly check. It’s important to understand that over your lifetime a great deal of money will pass through your hands. There’s a limit to the amount you will earn and it is a finite amount. How you handle your monthly cash flow deserves just as serious attention as would your lifetime income in a lump sum.
Let’s move on to cash flow. Most of the money we receive comes from our employer or occupation and usually comes to us on a weekly or monthly basis, paid hourly or through a negotiated salary. No matter how we get paid, we usually settle into regular spending habits called lifestyle and at the end of the month, there’s usually little to nothing leftover.
Not all income flowing into this tube will be yours. Some is going to be lost in taxes to the federal government and state income taxes. Before you get to spend it. It must pass the lifestyle regulator which you control. That determines how much of this money should be pumped into these two tanks called savings and investments before passing through to be consumed.
Notice we use the word pumped into your savings and investment tanks, which means it takes effort and energy. The natural flow is to flow past the lifestyle regulator and into your lifestyle and gone forever.
All income must flow past this valve, which is under your control. It regulates how much of your income is funneled into your savings and investment tanks or allowed to pass through to be consumed. Any dollar that’s not pumped into savings or investments flows directly into the lifestyle and is lost forever with the exception of the principal payments on your mortgage.
Those dollars are only recoverable if the property does not depreciate and is sold at a profit through a calculator called retirement ready or not. I can give you insight into the minimum amount of money that should be pumped into your savings and investment tanks for you to live the lifestyle you deserve during retirement. When we reach retirement for most of us, the cash flow coming in will seize and we will depend solely on the money we have put away in the savings and investment tanks for our retirement income.
If you’re serious about your financial future, you should know the answers to these questions today as you move toward retirement.
A, what return would I have to earn on my savings and investments for my current plan to work?
B, what is the minimum amount of money I need to be putting away each year to enjoy my present lifestyle during retirement?
C, how long would I have to work before I can retire and be able to enjoy my present standard of living until my life expectancy and
D, how much will I have to reduce my present standard of living to make my money last to my life expectancy? These tanks are long-term accounts and will be responsible for providing the dollars you will need when the cash flow from your occupation ceases. Keep in mind that our present cash flow could in prematurely through death, disability, sickness, or economic change, and you should give serious consideration to securing the protection you need to protect what you have as well as what you want in the future.
The fundamental feature of the savings tank is that it is safe, meaning that the money put into this position can’t be lost unless you move it to the investment tank or you drain the savings tank to fund a lifestyle expense, which is then lost forever.
In addition to providing retirement dollars, the savings tank should also provide the opportunity to help you finance major capital purchases such as cars, education, and weddings during your accumulation years. The investment tank offers the potential for higher returns, but also brings risk into the picture.
There are both saving and investment opportunities that provide the ability to postpone taxes on your contributions today and pay the taxes at the time of withdrawal at what bracket? Now, that’s a good question. If you’re in a high bracket today and postpone the taxes to the future at a lower bracket, you come out ahead.
If you’re in a low bracket today and have to pay taxes at a higher bracket at the time of withdrawal, you may want to discuss other options. The diverter valve is used to designate the flow you desire into which tank and you should probably have at least some money in each tank and deciding the split between how much should go to which tank. It’s important to remember the character of the tanks.
Every dollar deposited into the savings account is safe, meaning this money would never have the potential for loss and less move to the investment tank or if the tank is drained to be consumed. The investment tank potentially offers higher return opportunities. However, it also comes with risk. Your money levels can fluctuate up and down over time. In this tank, notice there is no top on this tank which represents the potential for loss.
Prudence would suggest that at different stages of your life, the diverter valve will be set to different flow res. Perhaps getting started, you might consider the lion’s share going into the savings tank to build a solid base before you consider putting money at risk.
As your capital base strengthens, you may wish to increase the flow into your investment tank while money can be deposited directly into your investment tank from income. Keep in mind that money can flow from your savings into the investment tank and back again perceived keeping.
A good rule of thumb would be to have enough money in your savings that could cover any major purchase. A major purchase is anything you wish to buy that you can’t cover the cost in full with monthly cash flow as we near retirement, you may wish to shift more from the investment tank to the savings tank for safety.
We would recommend that you seek professional financial counsel as to the flow rates that make the most sense for you at your present position. Distribution valves. These valves will be used to drain the tanks at a future date to provide the cash flow you desire for your retirement should your cash flow from your employment seize your retirement will be provided solely from funds you have in your savings and investment tags.
All funds coming out of the tanks must again pass through the lifestyle regulator. By managing the flow from these two tanks in unison, one can potentially increase the efficiency of the flow required, especially if taxes are due at the time of withdrawal. While it’s possible to withdraw money from these longterm accounts during your accumulation years.
Doing so without putting the money back and putting it back at interest can have a devastating impact on the money you may have available for future withdrawals during retirement.
Any money passing through the lifestyle regulator that is not diverted into your savings or investment tanks is lost forever with the exception of your mortgage principal payments and is only recoverable if the property does not depreciate and is sold at a profit. Let’s look at the things in this tube.
Sales taxes, education costs, food, clothing, phone, cars, gas to run your vehicles, vacations, maintenance, major medical insurance, property taxes, auto insurance, homeowners insurance, life insurance, weddings, cable TV giving, et cetera. Some of these items are major capital purchases, meaning the cost can’t be covered in full with your monthly cashflow and you’re forced to make other arrangements.
These large expenses are a normal part of living, yet they can create enormous financial stress. The three most common options to pay for these expenses include option one if you have no savings or investment dollars, the choice is made for you.
You must borrow, which is effectively dipping into your future income potential and borrowing money today against future earnings. Not only do you have to pay the price for what you bought, you must also pay interest. This creates additional pressure on your future earnings. This option is a trap that should be avoided at all costs.
View recover from supporting a lifestyle today by borrowing against their future. The temptation is great to fund your lifestyle today with the hope you can recover later. It’s a gamble and involves risk. The lending institutions are willing to gamble that you will pay them and your future earnings potential will last until they can recover their money and make a sizable profit. It’s a high-stakes game for both players.
Remember this, the Vegas strip was not built from winners, but losers option to pay cash by draining your savings or investment tank. Paying cash is not a bad strategy, but it does have a cost. Many never see if you pay cash, you still have payments. You have payments back to the account from which you took the money to return to the same position you were in before. The withdrawal.
There is inefficiency in paying cash for major capital purchases because it resets the compounding of interest on those dollars spent reducing the interest you could have earned each time you do it. Every time you drain the tank, you’re limiting the power of compound interest, which works best over time and without interruption. Option three, reduce your savings or investment dollars. You can open the lifestyle regulator valve to provide the increased cash flow needed to cover the amount of the purchase, which again negatively impacts your financial future.
Remember, any money removed from the tanks which are not put back is lost forever, as well as the interest at could have been earned had you left it in the tank.
All three of these options put additional pressure on your savings and investment tanks to provide retirement dollars in the future. All the options discussed to provide a way to finance the cost. None seemed to be very efficient. What if there was a strategy that would allow you to not only save for your retirement but also provide access to capital along the way for you to be able to make the major purchases you will face without having to drain the tank?
If there were a more efficient cash flow model than what you’re using today, that can help you make major capital purchases without going into debt, without resetting compound interest on your money, reduce your risk, reduce your tax liability, give you more control of your money, and help you minimize or avoid future losses. Would you want to know about it?
In this video, we have given you a solid way to approach your personal cash flow. In addition to answering the questions you may have about what you need to be doing, we would like to introduce you to the private strategy to give you insight into how to do what you need to do to maximize your cash flow.
It’s not the product you buy, but rather a way of doing what you’re already doing more efficiently. Call us to schedule an opportunity so we can share the private reserves strategy with you.