Everyone’s financial journey, especially as they approach mid-career, is intertwined with major life milestones and a slew of transitions. While everyone’s situations, goals and values are certainly unique, there are a few that drive many of the conversations I have with early and mid career high earning professionals.
Once you reach a point where you are established in your career and encounter some stability in your income and its trajectory, it is common to begin thinking about things like:
- Home ownership or vacation homes
- Starting a family
- Increasing retirement savings
- Having a better understanding of where you stand financially
- Saving up for college
- Tax reduction opportunities
While every financial plan is unique, the core of every plan includes
- Protecting your assets and family from worst case scenarios
- Increasing your net worth (this can be through increasing your asset base or creating an aggressive debt repayment strategy)
- Optimizing your cash flow to ensure you can enjoy life today with the understanding that you have plan for a secure future
Missed opportunities can have a larger impact on your ability to accumulate and foster wealth as you age and your income increases. Cash flow planning, while not the most exciting area of financial planning, is the foundation of your plan. A firm understanding of your cash flow, your stage of life, and the opportunities you want your money to capture for you will lead to a living financial plan that can help ensure your money is being used to accomplish the goals that are most important to you and your family.
Creating your Cash Flow Plan
The idea of budgeting is often unpleasant. Budgeting evokes emotions of scarcity and restriction and is difficult to follow for long periods of time. Cash flow planning takes a short term view, similar to budgeting, but also incorporates mid and long term goals. I prefer to use the term spending plan, which helps you figure out what you’re currently spending your hard earned money on, and if those expenses align with what you value and where you want to be in the future.
Cash flow… what is it anyways? In its purest form cash flow equals income minus expenses. While it sounds simple enough, it can be difficult to track over multiple debit and credit cards, venmo and other payment options.
1. Determining your income
Income refers to monthly net income. Net income is what you take home after taxes, retirement account contributions and pre-tax benefits offered through your employer.
2. Determining your Expenses
Expenses are different for everyone, but the most common expenses include:
Debts include things like credit card balances, mortgages and loans. Common loan types includes personal loans, car loans, student loans and home equity loans or lines of credit.
Taxes (excluding W-2 income taxes which are withheld from your paycheck)
W-2 income taxes are withheld from your paycheck, but there can be additional liabilities for those with supplemental income in the form of equity compensation. Side hustles and self employment income may not be withheld from paychecks, so it is important that you make estimated tax payments throughout the year. Additionally, capital gains taxes incurred from the selling of securities can also add to your tax liability.
Living expenses generally include items like food, gas, streaming subscriptions, cell phone plans, internet, gym memberships, running shoes (ok maybe that’s just me).
Discretionary expenses tend to be more flexible and often include eating out, going to bars, uber eats, or shorter vacations or travel plans.
It’s important to understand that contributions to savings accounts are technically an expense. However, these are expenses that you are paying to yourself to help solidify your financial situation. Savings often include building up an emergency fund, retirement account contributions, taxable brokerage account contributions, savings for education and big ticket purchases like a new car or sabbatical in Europe.
Insurance protects you and your family from financially crippling events. Typical insurance payments include those for homeowners insurance, auto insurance, umbrella insurance and professional liability insurance (depending on your profession).
3. Goal Setting
With an understanding of how to create your cash flow statement you can move on to the fun part, setting and prioritizing your goals! Your goals can be broken down into three buckets:
- Short Term: 0-2 Years
- Mid Term: 2-10 Years
- Long Term: Anything over 10 years
Determining where goals fall in your planning horizon can help you determine the mix of assets and accounts that are best suited for optimizing the chances of you reaching your unique goals. In addition to assigning and prioritizing your goals, it is helpful to create SMART goals to facilitate deployment of the unique set of strategies that are best suited to your situation.
Working through the SMART goal setting process can help you determine and implement attainable goals and keep you accountable. Creating a system to automate transfers to saving accounts, investment accounts and bill payments can help ensure that you are continuously making progress despite everything else you’re juggling.
Implementation and Key Takeaways
At this stage in your life things can change, and quickly! It’s important to check in on your plan consistently, and tweak goals or strategies as your life and career continues to unfold. Changes such as
- Equity compensation grants
- A promotion
- Career change
- Side hustle
- Starting a business
will all have major impacts on what is possible and when. Your goals will also impact every other area of your financial plan and help you determine:
- The investment risk you are capable and willing to take
- The location of your assets (Retirement account? Brokerage accounts? Savings Accounts? 529 plans? Health Savings Accounts?)
- Determining the role of tax efficient sources of income such as real estate
It isn’t uncommon for the optimal strategy from a financial or tax perspective to conflict with what makes the most sense for you on a personal level. Having an understanding of the options available and the tradeoffs inherent within each will lead to the financial plan that adheres to your definition of success. I’m an avid follower of Ray Dalio and his philosophical approach to life and personal finances. As Ray often likes to say “you can have just about anything you want but not everything you want”. Aligning your cash flow plan with your values and goals can help you optimize your chances of success in the areas that are most important to you and your family.
Disclaimer: The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. This content is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Hereford Financial disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.