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Open World Financial Life Planning - Cash Flow

All of That Extra Stuff

Ian Bloom, CFP® Covers the Extras tier of the Hierarchy of Cash Flow. All of that extra stuff we want, that's advertised to us constantly, is a lot more exciting to purchase if you know you don't have to give up your future goals and dreams to acquire it!

Transcript:

What's up internet? My name's Ian Bloom. Welcome to nerd finance. I'm your resident financial life planner and huge nerd. In today's episode, we're going to be talking about the final stage in this hierarchy of cash flows, which is extras. From a gaming perspective, which is how I like to talk about everything if you haven't figured that out by this point in the series, extras is when you are super powerful in the game. Not only do you understand the system, but you have maximized it to your benefit in every other aspect possible, and now you're just adding the icing on the cake. That cool legendary sword, or that piece of equipment that enables you to dominate any of the enemies or opposition you come up against. Extras is really just the extra stuff to enjoy the spice of life.

It might be getting takeout once a week. It might be spending extra money on gaming accessories, or sporting equipment, or going to concerts. Any of those things can be extras that are very enjoyable. And as we already talked about, extras can be woven through the different stages in some form or fashion. We do live in a consumer culture. So you will be advertised a lot of extras, like maybe that League of Legends skin that you want, or maybe that really good food that you saw in the commercial.

Those things are okay to buy occasionally for yourself in any one of these stages. But once you have all four of the previous stages taken care of, you get to enjoy the extras that you can afford guilt-free, which is the amazing part. It's way less stressful to spend money on extras when you know that the other things are taken care of, you have made sure that you have a roof over your head and the utility bills paid, you've made sure that you can continue to do that for the next six months, regardless of what happens with your employment. You have money that is growing towards your future and your financial independence, and you have some of the things that were core to the things that you wanted out of life. Whether that be that extra home in the mountains, or the cool car, or the trip to Europe.

And so now you get to focus on spending money on yourself, just for the heck of it. And boy, is that a joyous place. When you see people who are clearly living in the extra stage and have no guilt about it, you can see the joy on their face when they give to others. You can see the absolute purity of the fun that they're having. And it's all because they made sure to address the other four stages first. And moreover, all the other four stages and the extra stage look different for every person.

Some people like to live their lives very frugally. And so their retirement contributions in the future stage might not need to be that large. And some people like to live their lives a little lavishly. And so their retirement contributions might need to be greater in that same future stage, which may delay the amount of money that they have to focus on the extras. But whatever the situation is for you, just make sure that you're taking care of the core things before you move on to spending money on all of the flippant extras, though they are very enjoyable.

I hope you have a wonderful day. And I hope that this video has been, and the series has been, very, very helpful to you. The cashflow, a hierarchy tool is one that I have loved using with my clients. So I hope it benefits you as well. Have a wonderful, wonderful day. And thanks for watching.

Aspirational Cash Flow

Ian Bloom, CFP® covers the Aspirational tier of the Hierarchy of Cash Flow. Aspirational goals might be buying your dream home or taking that trip around the world. The important part is that if you've taken care of the previous three stages, achieving aspirational goals will be more freeing.

Transcript:

What's up internet? My name's Ian bloom. Welcome to Nerd Finance. I'm your resident, financial life planner and huge nerd. In today's episode, we are going to be talking about tier four of this graphic, the Hierarchy of Cash Flows. Tier four is aspiration. Aspirational expenses are some of the things that give our lives that extra little burst of meaning, so they are important, but it's important to have the other three stages taken care of first.

Aspirational stuff is what you think about when you're thinking about the moment in a game, where you have finally started to do the really cool stuff. Maybe you in Saints Row, and now you can leap tall buildings with a single bound. Or maybe you are in Skyrim, and now you have all three parts of Fus Ro and Dah, and you can throw enemies feet away from you whenever they are trying to attack you.

This is the really, really cool stuff that isn't necessarily to beat the game or to play the game at all, but is some of the extra stuff that you might be aspiring to. In real world terms, this is the savings for those extra, but meaningful, things in life. So you might have to contribute to a brokerage account over and above your retirement savings in order to make sure you get some of these things like a travel budget, or buying that perfect house that you've always wanted, or making sure that you have the dream car that you've been wanting since you were a kid.

Those things don't necessarily strike me as extras because they have significance to you. Traveling to a lot of people is what gives their life some amount of meaning. But making sure that they have all of the other foundational pieces in places, how they are comfortable with going on the trips, and not worried about how much money they spend while they're on the trips. Trust me, traveling is a lot more fun when you don't have to worry about the budget, which again is why all inclusive resorts have such a great business model, even though they make money hand over fist.

So all that being said, aspirational expenses come after you have already ensured your survival. You've built up an emergency fund via consistent savings. You've started contributing to your retirement and you have a little bit left over after that. This is a hard stage to reach because this means that your income is not just a little bit greater than your expenses, it's probably significantly greater. And you've probably done a lot of hard work to make sure that you have the emergency fund and the retirement contributions going in the background before you start planning for the Porsche, or the new house, or that amazing trip to Europe that you've always wanted. Those sorts of things matter, but they have to come after the other stuff.

For instance, if you spend money on experiences before you start saving for your future, you may get to take a great trip, but you may come back to a bunch of bills and expenses that you weren't planning on, like your car breaking down, or medical bills because of breaking your leg on the trip, or something like that. Those are not the things that we want to have happen in life. That causes extra stress, and cashflow is about getting a handle on the day to day of your finances, so that you don't have to be stressed out about it.

I hope that this continued conversation around the hierarchy of cash flows is interesting to you. We've now moved through survival, which is keeping the roof over your head and the food on the table. We've talked about stability, which is making sure you can meet those short term emergencies. We've talked about future money, which is focusing on retirement or those other long term moments that you want to have occur. Then now we've moved on to aspirational stuff, where you are making the cool things in your life happen.

The final thing we'll talk about are extras, which are little fluff pieces in the day to day that you need to make sure to budget for. That is the fifth tier of the Hierarchy of Cash Flows. And maybe the self actualization moment, although you could argue that that comes in at the aspirational stage. Anyway, I hope this video has been helpful to you, and I hope you have a wonderful day. Thanks so much for watching.

Creating Cash Flow Stability

Ian Bloom, CFP® discusses how to move from the Survival Tier of the Hierarchy of Cash Flow to the Stability Tier. This level up involves the creation of an emergency fund that can insulate the household from unexpected expenses. Creating cash flow stability is very necessary before moving on to the exciting ways to spend money.

Transcript:

What's up internet? My name's Ian Bloom. Welcome to Nerd Finance. I'm your resident financial life planner and huge nerd. In today's episode, we are going to be continuing to focus on this graphic, the Hierarchy of Cash Flows that I've been using to help my clients understand where they are in their cashflow journey. This is our second stage, stability. Stability is interesting because it comes after you've started to get a handle on things, whether it's in real life or in a game. See, stability is developed when you understand the mechanics of what you're trying to do and have somewhat of a basic rhythm to them. In a game it may come when you have your go-to combo of your sword and then your spell to take out the bad guys. Well, in real life, stability as a cashflow thing comes about when you have a consistent amount of income that is exceeding your expenses and have started to allocate the money properly.

What I mean by this is if you have $2,000 a month coming in and $1,500 you must spend on bills and needs like groceries, and you have $500 leftover, stability starts to develop. But instead of just spending that $500 on things like Xboxes, Nintendo Switches, and awesome games, or maybe the furniture that you want in your apartment, you actually start to allocate this money towards savings. You see, savings in an emergency fund is where stability actually comes from. Knowing that you have three to six months worth of expenses there to absorb all of the changes that will occur in your life. Life is bound to change, the rules of the game change every day. Your tire may pop or your hot water heater may break, and you may need to spend some money to replace those things. Well, it's going to be a lot easier to come up with the money if you already have it in savings. And it will disrupt your day-to-day life a lot less if you have built up these savings and can therefore absorb those impacts.

For instance, that $1,000 car repair sucks a lot more if you have $500 a month and you have to put it on your credit card and pay it off over two months, then if you already have $5,000 in savings and so you just pull a $1,000 out of that. Now, $5,000 in savings doesn't happen overnight, which is why stability is a stage and not just a step. See, you have to save the money over time. Let's go back to that earlier example. We have $2,000 in income coming into the household every month, we have to spend $1,500 of that on bills like groceries and things, and so we have $500 leftover. You may decide to allocate $250 a month to your savings to start building it up. And then you may spend the other $250 on the extras and things that you're having fun with. That is how you develop stability. It doesn't happen immediately, it happens by those repeated actions towards saving over time.

I hope that this video has been helpful to you. Stability is the stage that you want to reach to get rid of that financial stress that's been plaguing you for a while. It helps make the day to day less stressful. It helps you avoid that paycheck to paycheck dance. As we move through the rest of the series, we'll start focusing on the more aspirational things, the future stuff. Anyway, have a wonderful day. I hope the video was enjoyable.

Future-Focused Cash Flow

Ian Bloom, CFP® covers the Future tier of the Hierarchy of Cash Flow. The Future tier is all about contributing toward your retirement or future financial independence. Future-focused cash flow enables you to make long-term financial progress, not just prepare for the now.

Transcript:

What's up internet, my name's Ian Bloom. Welcome to Nerd Finance. I'm your resident financial life planner and huge nerd. Today we are focusing on the third stage in this graphic. You see, the future stage is very, very important to the development of a financial plan. And it's incredibly important to the hierarchy of cash flows going forward. Once you have developed stability and you can take care of those immediate needs, you will then be focused on what you can do for the future. The future is really important, because stability in the now is nice. But knowing that your future is taken care of is amazing. So the way that you start entering this stage is very, very simple. Let's use some gaming terminology. You have got a good grasp on the mechanics, and you have decided that your one, two punch of sword and spell works really well right now. But it will not work against the end game bosses. So you start to plan out the skills that you need to purchase at each level up in order to make sure that you're ready for the end game.

That is the future stage in a nutshell. As far as cashflow goes, it's when you start contributing to things like 401ks and Roth IRAs. It's when you start allocating dollars towards future use, so that future you will thank you today. And that's really, really important. Because creating wealth doesn't happen on accident. It is an intentional decision that has to be made once the household is safe, comfortable, and taken care of from a financial perspective. So what does this look like? Well, if you work at a traditional employer, it may look like just deciding that you need to put five or six, or seven, or eight or 10% into your 401k every month. And that after that, you can still maintain the household and keep up with your savings, right?

That will allow you to build towards a financially independent future. It may also look like something that's a little bit more in my neck of the woods, which is sitting down with a financial planner and saying, "Hey, how much money do I need to save in order to make sure I can have this life I want at age 55 or at age 65?" Whatever the age where you want to reach that financial independence stage is. And we can give you some exact numbers on that. But the least you can do is make sure that you're contributing something towards your retirement every single week or paycheck, or month. However you want to think about it. If you're in a non-traditional employer, you could also just contribute to something simple like a Roth IRA. A Roth IRA can be held at any custodian.

And it stands for Individual Retirement Account. So you're not required to have a particular employer to do that. You just have to have an income. So anyway, future focused money is money focused on the long-term. It's money focused on the things that you know that you will need later on, like the ability to take care of yourself financially. I hope this video was helpful to you. Keep in mind that the stability and the survival stages need to come before the future stage, because if you contribute money to your future, and your now is not secure, then you may end up needing to take the money out of the future focused account just to make ends meet today anyway. So make sure to do these things in ascending order. Though, don't put off your future contributions until you're all perfectly financially set, or you'll almost never start making those contributions. Thanks so much. And again, I hope this video was helpful to you. Have a wonderful day.

Survival Tier Cash Flow

Survival Tier Cash Flow: Ian Bloom, CFP® covers the Hierarchy of Cash Flow and the Survival stage. Thinking about your cash flow in the survival tier, you should be prioritizing more income and reducing expenses so that you can afford your basic needs.

Transcript:

What's up internet? My name's Ian Bloom. Welcome to Nerd Finance. I'm your resident, financial life planner and huge nerd. In today's episode, we are going to be talking about this graphic that I just came up with. And it's going to be the subject of a couple of conversations we're going to have on this channel over the next three, four weeks. You see, this is a hierarchy of cash flow, and basically it's designed to help you think about where you are and what things you should be focusing on with your spending money. Now, what I want to emphasize is much like the Maslow's hierarchy of needs or the food pyramid, just because something is foundational and comes first like survival, it doesn't mean that you should never spend any money on extras if you're in the survival stage. But what it does mean is that most of your money, time, and energy should be focused on the thing for the stage that you are currently at.

So let's talk a little bit about that in terms that a nerd like me might think about it. The survival stage, this first stage is when you are level one. It is when you're first starting to get a handle on the games mechanics, and the things that you should be thinking about and focusing on in order to make sure your character doesn't die or put themselves in a very unfortunate untenable situation. You might be learning how to cast your first magic spells or do battle with an Orc. But in reality, what this looks like is maybe you're graduating from college, or maybe you've been out of college for a while, but finances were pretty hard for you. And so you're starting to figure out that your income needs to be greater than your expenses in order for you to ascend to the next stage, which is stability, or maybe you've been here for a while.

In fact, unfortunately, a lot of Americans are back in this position due to the pandemic for the first time. You see, survival is when you're focused on keeping the roof over your head. It's when you're focused on putting food on the table or paying the bills. And essentially, the thing that gets you out of the survival state is having a consistent income that is greater than your expenses.

Now, this may mean that your income needs to rise. Like you just lost your job and you need to find a new one, or you need that new promotion, or it may mean that your expenses need to fall. And expenses falling is one of the hardest things to do because you get used to the spending and all those things. Also, even though I said earlier in the video that you don't need to not spend any money on extras during the survival stage, because sometimes spending a little bit on yourself can keep you sane and rewarded, some people tend to spend a little bit too much on extras way too early in this hierarchy.

You see, extras are those things that are advertised to you all the time. And so they're very tempting to spend money on, but for survival, you need to focus on the basics, food, water, shelter. And probably electricity and internet in this day and age, let's be honest. It's hard to work without the internet. So anyway, for the next three, four weeks, we're going to be ascending through this pyramid and talking about the rest of the stages. And I hope that this conversation is interesting to you. There's a lot to talk about here. Cashflow is something that I deal with as a financial planner all the time. So if you have questions, make sure to leave them down below or send me an email or just book an appointment on my website. Anyway, I hope this video was helpful to you. Have a wonderful day.