The month of August was consumed with the issue of the U.S. debt ceiling and all of the subsequent fall-out that occurred afterwards. As usual, the debt ceiling was only the “tip of the iceberg” of our country’s real issues. Below is data from an e-mail that has been circulating that does a great job of explaining this country’s debt in terms we can all comprehend:
• U.S. Tax revenue: $2,170,000,000,000
• Federal budget: $3,820,000,000,000
• New debt: $ 1,650,000,000,000
• National debt: $14,271,000,000,000
• Recent budget cut: $ 38,500,000,000
Let's remove 8 zeros and pretend it's a household budget:
• Annual family income: $21,700
• Money the family spent: $38,200
• New debt on the credit card: $16,500
• Outstanding balance on the credit card: $142,710
• Total budget cuts: $385
Businesses and governments should be checking barometers on a regular basis. Are you checking the dashboard of your vehicle as you travel on your financial journey from success to significance?
Some of the items on your dashboard are periodically examining your business and personal cash flows. Are you reviewing your cash flow and asset-to-liability ratios? Determining what expenses to eliminate may be the starting point of this exercise, but the second dimension of cash flow analysis may uncover “free cash” to be reallocated to wealth-building and asset-protection strategies.
Some of your focus and worry may be centered on your investment/portfolio performance. You may speculate and agonize on the events that are occurring beyond your control, and you expect your portfolio managers to have the “crystal ball” to help avoid the downturns and capitalize on the upticks. You soon realize that it is futile to attempt to manage those events beyond your control. Our intent should be to adapt and adjust to these events and control things we have the ability to manage.
What can we control and influence directly? What family strategies can be employed now during this period of uncertainty? In recent years our society has been characterized as a more affluent one. If you open a dictionary to the word affluent you will find that affluent has its roots in the Ancient Latin word, affluere, which means “flow freely.” Yes, for consumers, money does flow too freely. So let us explore some simple concepts.
Other than the proverbial miscellaneous expenses, what other categories come to mind where you might be overspending? Is this a good time to refinance your mortgage? Interest rates are low once again. Is this time to review your cash flow to reduce the cost of your mortgage? The debate continues as to whether to maintain or reduce mortgage balances. With the fall out that has occurred in the real estate market, what is the most appropriate strategy for you, especially if you don’t plan on living in your present home forever, and if you don’t expect real estate and financial markets to recover for quite some time? Refinancing may be the catalyst to reduce mortgage costs to free up cash to purchase wealth-building assets and strategies.
Let’s pinpoint some cash flow reallocation items. Obviously if you refinanced for a longer term or if you secured an adjustable rate mortgage (ARM), your principle and interest payment is lower. Should those mortgage savings go to increasing your 401(k) contribution? Fund your child’s/grandchild’s 529 plan? The 401(k) contribution creates a federal and Ohio state income tax deduction, the other creates a tax-free accumulation account for education. The choice depends upon what your strategic financial plan is trying to accomplish. Maybe both strategies need to be done, but where does the cash flow come from if your income potential is limited?
Where else can we find cash that can be re-directed?
If you examine your payroll withholding and/or quarterly tax payments, will you receive a refund or will you owe taxes? The ideal is to pay via estimated payments, and payroll withholding should be exactly what you will owe, and the balance in excess withholding or quarterly payments should be reallocated to categories to build your wealth on a regular basis. Periodically consulting with your tax advisor can maximize this strategy.
Are you paying too much for life insurance or auto and homeowner’s coverage? Maybe you would like to purchase long-term care insurance, but the premium would challenge your monthly budget. So rather than always spending more money to purchase things, why not review the expense of current items first. For example, by increasing your deductibles on your auto and/or home insurances, you may realize substantial savings. These savings then can be applied to those items warranted by your new financial direction.
Are there benefits that you are paying for that could be treated as a company benefit and paid to you as a fringe benefit? What if your advisor has been telling you to purchase long-term care insurance? Should it be purchased with company dollars or your personal dollars? What if we discovered that you’re paying too much for life insurance coverage and/or homeowner’s/auto coverage?
The point of this discussion is, even though people do not like to review cash flow (aka budget), the more we explore items in the budget, the more we are able to extract dollars that could be repositioned to build wealth during this period of uncertainty. Are you making the appropriate choices regarding how you spend your money?
I look forward to your comments and questions.
Robert A. Valente, CFP®, AEP®, is CEO and Managing Member of RAV Financial Services LLC. He can be reached at firstname.lastname@example.org.