Investment and Cash Flow Needs

Individual investors face a variety of investment and cash flow needs.  At a basic level, there is a need to meet current short-term spending needs/requirements and unexpected emergencies.  In addition, there are medium term needs like saving for a down payment to purchase a house.  There are also long-term needs to provide for retirement income in the later years.  Another common need is for education beyond public school for yourself and for children and grandchildren.  Finally, estate planning considerations become important for seniors.  At the most basic level, it is helpful to set up various buckets to meet the risk and return expectations.

Budgeting & SetUp:

Whether you are a millennial just getting started, a highly-successful professional with a multi-million portfolio, or a retiree, you need a budget to direct cash flows to the most appropriate uses.  This budget should fulfill the objectives of your major spending “buckets” as defined further down in this section.  Incorporate your budget plan into your day-to-day operations, and review it on a monthly basis.

Major Budget Categories:

1. Non-Discretionary essentials.  Housing, utilities, food, Minimums on debt.

2. Establish an Emergency Fund/$ Amount.

3. Stewardship/Tithe.

4. Retirement.

5. Discretionary.  Discretionary includes Fun Money.  Hobbies, Travel, funding trusts.

Construct a balance sheet that lists all tangible and investment assets, debt and Net Worth.It is also important to determine your credit score, and to monitor your score over time.

To help achieve these goals, it is helpful to utilize a spending tracker like mint.com.  KeePass can be used for Passwords.

 

Short-Term Bucket 1:

This bucket covers cash flow needs and surprises over the next 6 months and starts with a bank checking account and a savings account.

Planners often say that you need to save 10-20%, and that you need to have 6 months of savings to cover emergencies, job loss, etc.  The reality is that it is unrealistic to achieve these savings goals when you are just starting your first job.  Instead, it is better to plan a course to achieving the savings goals within the next couple years.

Your budget needs to cover non-discretionary spending like food and rent, and then provide for discretionary fun items, savings, stewardship and retirement.

A key factor is to pay off highest interest rate debt first.

Have enough in the bank to cover a big unexpected expense like a car repair.

Emergencies will happen, and should be planned for and saving for these emergencies means you don’t need to go back into debt.

Use rebalancing to replenish the cash bucket.  If rebalancing is insufficient, then determine which outperforming/overweight assets need to be liquidated.  Use the markets opportunistically instead of re-actively.

The Short-Term Bucket should allow for a monthly draw when in retirement.

 

Intermediate Term Bucket 2:

6 months to 3-5 Years.  A savings account is a good way to build and maintain this bucket.  This bucket should be used for a car purchase, a house down payment, and college expenses.

Establish a monthly automatic withdrawal schedule from checking to a savings account to fund this bucket.

Objective should be minimal/no car debt.  Ideally, debt should be used only for a home mortgage or education, but this objective is unlikely in the near-term.

For High Net Worth individuals, this bucket can come from dividends and interest from the Long-Term bucket.

 

Long-Term Bucket 3:

This bucket is for your retirement funds and other long-term objectives like a vacation property or a special travel trip.  This bucket will be comprised of Qualified retirement plans like 401Ks, 403Bs and Individual Retirement Accounts-IRAs.  This bucket will also likely include taxable accounts.

The funding priority should first go to your retirement plan and to ensure that you invest at a level to receive any employer match.  After that, you want to increase your retirement contributions each year.  Careful consideration needs to be given to salary increases so that a large portion goes to savings rather than simply spending the salary increase.  Auto-escalation is a way to do this.  A good plan is to increase your savings rate (like 401k) by at least 1% every year.  Ultimately, you want to max out your 401k Plan.

 

Other Buckets:

College funding for yourself, your kids, or your grandkids is a prime example of a separate bucket for educational purposes.

 

Life Planning And Other Comments:

-Retirees ask do I have enough money when they should ask do I have sufficient purpose.

-Examine buying/spending on what you really care about.  This “should help you feel better about what you did buy”.

-Realize the good feelings from giving money to charities.