The 3 Core Money Elements
- Good money habits are built around your cash flow, taxes, and balance sheet.
- Review your cash flow, taxes, and balance sheet on a regular basis. Don’t hesitate to make the necessary adjustments so you can keep them in balance.
- Your balance sheet should provide assets for the short term, intermediate term, and long term. Lean toward investments that are tax-advantaged.
Many years ago, I went through the U.S. Army’s Jump School. We did one drill, called PLFs (parachute landing falls), on a daily basis. The idea was to practice how to land correctly every time when you’re “under canopy” so you don’t get injured. We repeated the drill hundreds of times a day, and it got to be monotonous.
Good money habits involve repetition also. In particular, regular monitoring of three things – your cash flow, taxes, and balance sheet- is extremely important. At a minimum, you should review them annually. Preferably, more often.
- Cash flow is really about your spending plan and making sure more money is coming in than is going out—i.e., your budget. Do you have any large expenditures coming up? Are your ongoing expenses okay or is there something that you’d like to change? Is your cash flow coming from the right sources, and if so, is it tax-efficient? Cash flow is related to everything we do. If we don’t have the cash flow to pay our bills, we tend to feel poor. So make sure your cash flow is really solid and clean.
- Taxes are an important part of cash flow. They can be a significant expense for you and can eat into your investment returns, so try to stay as well informed as possible about your taxes. We want our investments to be tax-deductible, and if not, then tax-deferred, or at least tax-free. The U.S. tax code changes all the time, as does your financial situation. Don’t let yourself be caught off guard.
- Balance sheet is all about structure. You need assets for the short term, intermediate term, and long term. Short-term assets are for day-to-day spending; it goes on and comes off your balance sheet regularly. Short-term assets are also money that you set aside to cover at least six months of expenses in case you run into hard times. Intermediate-term assets are for three to five years of expenses—it’s money you can tap into when bad stuff happens to you or is caused by the economy, the markets or things that go bump in the night. Finally, you have long-term assets, which need to be well diversified and keep you ahead of inflation. Long-term assets need to grow—after adjusting for inflation—because they are for your future and your family’s future. That’s why structure in the balance sheet is really important.
Just as with PLFs, you want to be doing your money drills all the time. Keeping regular tabs on your cash flow, taxes, and balance sheet—at least once a year—will make a big difference in your money fitness and prevent you from becoming financially injured.
Until next time, enjoy!
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Gary Klaben is in our Glenview, IL office and serves our clients who are now located all over the country. He has over 30 years of experience and is the author of Changing the Conversation, The Wealth Sanctuary and co-author of The Business Battlefield. Whether advising his clients, mentoring his team, or coaching entrepreneurs, he is always simplifying complexity and motivating others to take the next action that’s right for them.
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