Views of Money – Part 1: Objective Setting and Simple and Advanced Cash Flow

Cash Money

Money is important.  It is the lifeblood of our society.  It is our economy.  In the context of our modern culture it is a requirement for our day to day living.  If you doubt this notion, imagine yourself penniless for the next 30 days.

Money also is dynamic.  It is huge in the context of government spending programs or corporate initiatives.  Equally so, it is small measured against our next meal or gas tank top-off.  Money is even tiny as it collects nightly in our change cup.

A former teacher oft shared a story of 3 blind men describing an elephant.  The man at the trunk reported an animal significantly different from those reporting from the side and tail of the animal.  All reported a piece of the truth but not a whole truth. 

Money operates in our lives in a very similar manner.  Many of our views on money are technically correct, but lacking a grasp of the greater whole.

Last week I wrote about viewing our spending on a day over day basis and last year I penned an entry on viewing our incomes as annual rather than hourly inflow.  Both stances are valid and accurate and true and both articles garnered interesting responses.  While no one outright disagreed with my position in those articles, many shared an alternative visual.

Across this two part series I want to reconcile several views to ensure that we keep each in proper balance.  If we skew too hard in one direction we’re likely to end up with a distorted picture of reality. 

The key to our money, as with many things in our lives, is proper balance.

Today we will examine:

View 1 – Income and Outflow:  Objective Setting

View 2 – The Short View – Simple Cash Flow

View 3 – The Mid View – Advanced Cash Flow and Budgeting

 

View 1 – Income and Outflow:  Objective Setting

The starting point is obvious but important.  Money is like water.  It flows into our lives as income and out as spending or expenses.  An important first lesson is that we can control the rate of each flow.  The type of job we have, the hours we work, or even a second job; all drive the income equation.  How we spend that money is the outflow. 

The question we need to consider is how we want to engage this flow.  Do we want to forever swim in the steady but potentially uneven flow of money or do we want to dam the waters and build for ourselves a reservoir as fortification against future uncertainties.

The answer here is pretty obvious but our decision point should then project itself throughout our other vantage points.  That is where the idea of reconciling these views comes in handy.  Are our actions congruent with our objectives?

 

View 2 – The Short View – Simple Cash Flow

The Short View of Money is often the earliest lesson we learn and in that way is the easiest and least mature.  That is not to say that it lacks value, but that this should not our landing spot – though, unfortunately, it is for many.

Our earliest jobs in high school and college are simple time exchanges for money.  I trade one hour of attendance for a set number of dollars.

If, as we progress into higher payer jobs and even careers, we maintain only this simplistic point of view, then we often see our monthly income as a to-do list rather than a resource.

Rent – Check; Food – Check; Utilities – Check… and down the line until we discover that there’s a full $500 left at the end of our income.  To this mentality, that starts to sound like a new car and payments on a flat screen TV, still with a few dollars left over for a minimum payments against a credit card or two.

This view and approach leaves us perpetually stuck in neutral, which probably does not reconcile well against your goal from View 1.

A popular personal finance book, Your Money or Your Life adds a level of sophistication to the Short View.  The thesis of the book largely agrees with the idea of viewing our income as an hourly exchange but only as a perspective rather than a way of life.  If we acknowledge that our lives are finite, then each hour we engage in an activity is an hour forever gone.  In this context then we should consider both our income objectives – think early retirement on the beach or unencumbered time with loved ones – and our spending patterns – think 6 hours a week to hump a stinking car note.

 

View 3 – The Mid View – Advanced Cash Flow and Budgeting

In combat, the simplest rule of thumb is to control the high ground.  While I can envision fighting ‘downhill’ as easier, the objective is to have an advantaged point of view.

In this view we shift our money thinking from hourly wage, weekly paycheck, and even monthly checkbook balancing to annual planning.

While annual planning certainly requires a working knowledge of monthly incomes and expenses, it also anticipates events over a longer time horizon. 

Anticipating an annual car repair is not itself unreasonable, but too many people forget that Christmas comes every December and thereby create a deficit that is otherwise fully predictable.

The key then to the Mid View is to plan your income and expenses (monthly, irregular, and unknown), for the entire year.

A straightforward method for this is to craft monthly budget templates for the entire year while being sure to incorporate a monthly (1/12th) allocation for Known Annual expenses (insurances, HOA dues, Holidays/Birthdays, etc), and an allocation into savings for buffer against future unknown expenses (car repair, hot water heater replacement, other).

Dave Ramsey’s popular book The Total Money Makeover is a perfect discussion in the How-To and Why-To elevate into this line of sight.

 

Getting to this point is a significant accomplishment for many and in that way it can easily become a plateau.  That can be ok, but advanced prosperity requires still more advanced thinking.

Come back next week for Part Two in the series where we’ll review:

View 4 – The Long View – Net Worth Planning

View 5 – Mosaic View – Balanced Perspectives

View 6 – The Lost View – Opportunity Costs

 

Photo By: lincolnblues

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Category: Personal Finance

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