In my experience working with clients across various income and net worth figures, and common theme typically comes to light – they want help managing their cash flow to create sufficient liquidity month to month.
Now, to be clear, I am not here to say a detailed budget is needed - I do this type of planning for a living, and we do not maintain a budget as a family. My primary goal is to illustrate a simple method behind creating liquidity from your monthly cash flow for emergencies, large purchases, etc. while also providing yourself ‘with permission’ to enjoy your life. I find that many clients come to see me without a budget (which as I stated above is totally fine), but they seem to be ashamed that they do not maintain one. I am quick to say that they are not alone and it is OK to not have a budget, and I remind them that as long as they are not accruing credit card debt, or completely draining their liquid savings, there is absolutely nothing wrong with spending freely and enjoying their time.
At this point, clients typically look at me like I have three heads and ask me to explain…I always am happy to paint a clearer picture!
Moreover, I personally follow the model of ‘reverse budgeting’ – this is a concept that has gained some traction recently on social media, but it has been around for a very long time. This concept loops in the old saying of ‘pay yourself first’ as the arrangement calls for you to set aside a specific amount per month to your liquid savings account prior to spending on a discretionary basis. To go deeper here, after you contribute to your retirement plan through work and receive your net pay, go spend on your ‘essential fixed expenses’ – housing (rent or mortgage payments), groceries, other debt payment (car payments, car maintenance, line of credit, etc.). Next, decide on a specific monthly amount of $500, $1,000, or $3,000 per month, and set this aside in your savings account.
The actual figure could be based on one, or a few different goals – future down payment for a home purchase (or second home), building to 3-6 months of living expenses (emergency fund), future vacation cost, home renovations, and the list goes on. It should be noted that 100% of this amount does not need to go into your savings account, as it can go into a money market fund, or tax investment account – both of these vehicles can easily be converted to cash (hence the emphasis on liquidity). For example, lets say the select amount is $3,000 – you can put $1,500 into savings and $1,500 into a taxable investment account and have it invested with the potential to grow at a higher rate than the savings account.
Once you allocate these monies to savings, you have now given yourself permission to ‘spend the rest’, as you have already checked the boxes of contributing to your employer plan, purchasing the essentials needed to survive / run your household, and created liquidity from your monthly cash flow…why not go enjoy the rest on discretionary expenses?!
In my opinion, this method is a guilty free way to enjoy your hard earned cash flow to the fullest extent, while still remaining responsible in your finances! As I stated above, this method will not work for everybody, it is up to the individual / family to understand what works for them. But in any event, I do believe this methodology is a great starting point, especially when I work with clients who have all the best intentions of maintaining liquidity, but they never get there because they spend before completing the act of saving…at that point very little is left to save at the end of the month.
Operating in this manner also helps when big expenses are on the horizon, as you already have the full amount (or majority) set aside in cash. This avoids pulling directly from your cash flow and limiting your liquidity for that period of time. Of course, life will inevitably happen, and unplanned expenses will pop up, but ultimately the goal is to minimize the stress in this scenario as much as possible.
Concerning folks who are in Sales as an occupation, where their compensation is made up of a combination of a base salary and commission (variable amounts), we always work to come up with the savings figure based off the guaranteed compensation (base salary), and any amount saved from the commission portion is gravy, or simply earmarked to a big ticket expense ahead of time.
Going further on the liquidity piece, I highly encourage my clients at all levels to maintain a healthy balance of liquid funds in some capacity. I am OK with this being in their savings account, money market account, or a taxable investment account. There have been more instances than you would expect where folks who have high levels of income and a retirement assets, have very little liquidity (cash or securities easily converted to cash). This can present challenges when your roof needs to be replaced, or your create requires a major repair. In this instance, a level of unnecessary taxes, fees, or consumer debt, can originate as a direct result of not properly planning out buckets of liquidity.
On the other hand, some folks come to see me with too much liquidity sitting idle earning no interest. Here we dive into an analysis to determine how much we need to truly keep liquid for the next 6-12 months (based on anticipate expenses), then we come up with an allocation plan for the remaining balance. This helps with maximizing their dollars while also maintaining a good level of confidence that they can weather the unexpected.
In conclusion, it is no secret that a key ingredient to financial independence is building your retirement assets through saving, investing, and limiting frivolous spending. However, I argue that there is always a balance in everything we do, if you are saving as much as you can but not enjoying your life is it all worth it? In my opinion, NO, it is not worth the stress and fear of missing out on events or activities that pop up in our daily lives.
To me, the ultimate goal is to strike the appropriate balance within each client situation that allows them to save, invest, maintain liquidity, and most importantly enjoy your time on this earth!
As I stated above, this approach is exactly how my wife and I operate our financial household, so in a way I am right alongside my clients as they navigate this journey!
With that said, this type of process does not need to be scary, stressful, or filled with unknowns, sometimes the biggest factor is simply finding the right partner to work with on your journey.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give tax or legal advice.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.