Cash Flow Awareness

One of the main things our firm has learned from studying behavioral finance is that most people with good money habits make financial decisions in certain ways. To understand this decision-making paradigm, you first need to understand what certain words mean to people with good money habits. Here are the subjective definitions we have given certain words based on tens of thousands of conversations with clients on the topics of money and finance.

Saving: To accumulate money in places where there is little to no risk of one’s principal. By saving, the person is not concerned about the return ON their money but rather the focus is on the return OF their money. Saving is normally a conscious act by someone with good money habits and for decades it has resulted in people building up balances in various bank accounts (checking, savings, money market, and certificate of deposits).

Investing: To put money to work in specific assets or financial vehicles that have the potential to generate a return on the principal. Your principal becomes your initial investment and you become an investor. If successful, you will receive a return on investment (ROI) or what we called in the last chapter an internal return. Note: the process of investing involves the risk of losing your principal and there are many different types of risk that investors face. Determining the appropriate amount of risk for each investment is a subjective process and needs to be measured based on an individual’s personal/business economy.

Spending: When someone plans to spend their money in the context of good money habits, it means they are paying for either normal variable monthly expenses to maintain their lifestyle or they are purchasing big ticket items to improve their lifestyle. Note: these items are not the normal, reoccurring expenses that people associate with the act of paying their bills.

Here are some examples of different types of planned spending:

Maintaining Your Lifestyle: Pay your income taxes, cover unforeseen emergencies, assist a family member, household upkeep, healthcare, etc.

Improve Your Lifestyle: Home improvements, new autos, travel, children’s education, gifts, additional real estate, buying a business, etc.

When a person with good money habits spends their money, that principal is viewed as being gone forever. There is an opportunity cost present when this happens as their principal is no longer able to generate any type of return in the future. We call this an external return because the money is no longer in your control. Our intention is to help someone choose to spend their money while reducing or eliminating certain opportunity costs over their lifetime. It’s important to understand the dynamic between these three words – SAVE, INVEST, and SPEND – and why some people confuse their meaning.

For example, it is possible for someone to invest or spend money without actually saving it first. We would not consider this person to be a conservative saver because they are most likely taking on more risk with their investments and could be spending through the use of debt. Not all types of debt are bad but debt does add more risk…

On the other hand, there are many people who are not comfortable with the idea of risk and choose to save but never truly invest. This type of saver usually accumulates money in their bank accounts, works hard to pay off their debts as soon as possible, and struggle with the idea of spending their hard earned money. This occurs because they possess a fear about the unknown future and this person is constantly worried about needing their money in case of an emergency.

We want to help our clients realize their good money habits of saving first actually provide them with more flexibility, access, and control of their money. Whether they invest or spend those dollars is up to them; after all, it’s your money! Here’s how we help our clients visualize the process of taking control of their personal/business economies:

The act of saving occurs prior to the decision to invest or spend for someone with good money habits. We call this process Cash Flow Awareness. Whether someone saves money on a monthly basis or accumulates money in big chunks due to financial windfalls (i.e. bonus, commissions earned, business distribution, inheritance, etc.), they are going to store that money some place safe until allocating it between investments or current spending needs & wants. The process of storing money in a safe place is called accumulation and the process of deciding whether to invest or spend your savings is called utilization.

Utilization strategies are seldom a topic financial professionals educate their clients about when discussing their financial pictures. Our industry is usually zeroed in on investment conversations and the majority of financial vehicles that exist in the marketplace today revolve around a risk/return mindset. The thinking is that in order to achieve higher returns, an investor must be prepared to take on more risk in their financial picture. Our focus with utilization strategies centers around four main questions concerning a client’s cash flow awareness:

• What is the purpose of your money? To Invest or Spend?
• What is the time horizon for each purpose? Long Term or Short Term?
• Are their specific risks you would like to minimize over that time frame?
• Where do you currently store your savings?

Getting answers to these questions allows the financial professional to act as an advocate for their clients’ best interests. Ultimately, we aim to teach our clients to simply discover what dollars are flowing into your control and what dollars are flowing out of your control. Then, strategize so more money flows into your control. The end result will be more money for you to retain and utilize during your lifetime and more money for future generations.

Our firm believes there are different elements to banking and we believe how each element functions in your personal/business economy is critical for people to understand. Actually, you could define banking in different ways:

• Paying your bills out of your checking account on a month-to-month basis (Managing your finances)
• Financing purchases with money you don’t currently have in your possession (Borrow money)
• Paying cash for a purchase out of your savings/money market account (Save money)

No matter what method or methods of banking you operate under, everyone has two areas of focus with their money:

1) Making money and earning a living in his or her occupation, career, or business so you can begin to save, invest, and utilize your hard earned dollars.

2) Managing your personal or business economy through strategic financing and cash flow awareness with your money-to-month expenses and big ticket purchases.

For several years, our firm has been doing research to determine why today’s traditional banking system doesn’t appear to benefit savers as it used to over the past 30+ years. Since banks have long been a place for people to store money, the reasons behind this action were simple – banks provided SAFETY of principal, LIQUIDITY through access to your money at any time, and GROWTH through interest on any account balance you kept at the bank.

Today’s relationship between banks and savers has changed dramatically. Now savers are earning less than 1% on their bank accounts because banks don’t need any more deposits to function. Subsequently, the Federal Reserve is punishing savers and increasing the risks associated with inflation, taxes and longevity in a saver’s economy. I've seen advertisements from banks with offers to pay 5+% interest on a business sweep account back in 2007. I've also seen advertisements showing offerings banks for a “high yield” 12-month CD in 2014. It will pay 1% interest to function in a similar way the sweep account did back in 2007 – but pay 80% less in interest. That is a dramatic shifting in expectations for savers in a seven year period.  Unfortunately, in 2018, the situation has not changed...

What’s wrong with this picture? Do savers deserve to earn 80% less on their hard earned savings at a time when they desire more safety, liquidity, and growth? Or, is it time to look for a different financial institution to assist you with the purpose of your safe money. Might we all benefit from "thinking differently" about WHERE we store our savings and HOW we utilize those funds? To learn more on this subject, I encourage you to read a few of our educational books:

Thinking Differently About Your Money

Building Your Own Privatized Banking System

You can also watch one of our videos:

e3 Wealth: Thinking Differently About Alternative Asset Classes

Thank you for reading.