The end of Summer and back to school time are a period of change for our household finances. This is generally when my wife and I get our raises, her contract gets negotiated, and a lot of other expenses or credits get mixed into our budget.
So for us, this is a great time to take another look at our cash flow plan and see if any revisions are necessary.
The Spotlight on Cash Flow:
As we all know, having a budget is absolutely essential to financial stability. Unless income > expenses, you’ll never have control over your finances.
So once you DO have your budget somewhat under control, what’s the next step? This is where your cash flow plan comes into play.
With a cash flow plan, you need to decide how you will divide up your income not only so that each of your goals will succeed, but also so that your getting the maximum potential out of your cash. In other words, where can you put your money so that it works the hardest?
Most importantly of all, if you are really clever, you’ll set put your money into things that will generate even more money for you later on!
Our Cash Flow Plan Revised:
It’s been a while since my last cash flow plan update. In this go around, I decided to change the format to something a little more like what was presented in the book Rich Dad Poor Dad. Here is my revised cash flow plan:
Employment Income: Obviously our employment income will satisfy things like our everyday expenses (utilities, credit cards, food, gas, etc) as well as the BIG long term liabilities like our house and car payments. Even though I “could” make extra payments, I elect not to because I’d rather put that money towards my Assets. My retirement goals are of a higher priority to me.
My Assets include all the major items like our 403b, 401k and IRA retirement plans, and even our children’s 529 college savings fund. If you notice, I chose not to fund these items with my annual profit sharing bonus or tax refund because these things are never guaranteed year after year, and can fluctuate in value. Instead, I’d rather keep these things part of my regular monthly budget and just learn to work around them rather than financing my retirement plans with “extra” discretionary sources of income.
Even though it has taken years, we’ve been able to max out our 401k and IRA plans. The 403b is nearly maxed out.
Blog Income: Fortunately, this blog has started to generate a little bit of money for me. So what should I do with it? Again, should I pay down my long term liabilities?
No, my goal with this new found income source was to put the money into something that would create yet another income source for me. This is why I have elected to use blog income to fund my dividend stock fund.
Again, you might ask why not use the money to pay off my liabilities faster and become debt free? As nice as this sounds, I don’t believe this is the smarter choice for my cash flow plan:
1) My house and car are both on fixed 3.75% and 2.25% interest rates. My dividend stock fund not only has the potential to grow like an index fund, but also will generate a return of 3 to 4%. Therefore, the dividend stock fund has better long term potential.
2) Because they are equities, dividend stocks have the opportunity to grow with inflation. Your fixed rate house and car loan payments will actually decrease in value with inflation as time goes on. For example, paying a $1,000 house payment 30 years from now will feel much “smaller” than the same $1,000 house payment you pay today.
Will I ever use the blog income to re-invest in my website or start another one? We’ll see …
Dividend Stocks and Income: Outside of our retirement funds, growing our dividend stock fund will be very important to us over the next few years. The income from the dividends will be used to purchase more dividend stocks the following year. Where we’ll really be getting a boost in purchasing power is with our annual profit sharing income and tax return.
Profit Sharing and Tax Refund: Even though they only come once a year, these sources of income will usually serve a great number of purposes for our cash flow plan. In terms of assets, they will be used to buy more dividend stocks as well as build up our general savings.
And as for getting out of debt quicker, this is the part of the cash flow plan where that happens. Because these funds are discretionary, they will be used to lower the amount of money we owe on our liabilities so we can slightly accelerate being debt free.
Critiques of My Cash Flow Plan:
• Most of my assets are retirement bound and will not be available until I reach age 59-1/2. While that’s okay for retirement, that will not help me now or my early retirement ambitions. I need more smart-tax income sources that will “bridge” my path to early retirement!
• Like the dividend stocks, I need to create more asset groups that will lead to additional sources of income generation. Should my next side hustle be in real-estate, another Internet related property (such as another blog or website), or something else?
Readers – What’s in your cash flow plan? How do you have your money setup for optimal efficiency? Where do you see your money creating sources of income for you in the future?
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