- If nothing else, young adults should understand their balance sheet, cash flow and taxes for a happy financial life.
- Remember to always save first, spend second.
- As you get older, your assets grow and so do your expenses. Never take your eye off the big picture (see the first two takeaways).
About 20 years ago, I sat in the front row of a Rotary function. The guest speaker was a flower arranger. I wasn’t looking forward to the presentation, until she mentioned that floral arrangements were all about structure. My ears perked up, since I’m into structure. The speaker said she used a carefully refined process to arrange her flowers. There were no gaps in her arrangements. Each was beautiful and symmetrical. I thought I could learn flower arranging since I’m good at structure. Turns out I’m a lousy flower arranger, but so many things in life are like flower arrangements—complicated and random on the surface, but simple and beautiful when you follow the right structure. Money works the same way. It seems very complicated at times, but it’s really about three important things: Your balance sheet, your cash flow and your taxes.
- Your balance sheet is about your assets and your liabilities—i.e., what you own and what you owe. As a young adult, you often have more liabilities—student loans, credit card debt, auto loans and more—than assets. As you get older, you start to accumulate assets—a house, 401(k) plan, savings account, checking account and other assets. Each has its own structure. What kind of student loans do you have? How do you pay them? Can you combine them? What kind of mortgage do you have? Can you structure it differently? Your balance sheet becomes a very important aspect of your overall structure.
- Cash flow is simply how much income is coming in versus how much in expenses is going out. We have different sources of income. For most of us, it’s a salary. But we may also have income from investments, part-time gigs and other sources. Expenses go out in a variety of different ways and the structure of your expenses is very important. Rule #1 is to save first, spend second. Do automatic withdrawals from your paycheck so you always have money accumulating on your balance sheet, whether it’s your 401(k) or another structured savings plan. Then look at your spending. Do you know how much you need every month for basic expenses? Can you make 13 mortgage payments a year rather than 12? If so, you’ll be amazed how much faster your home loan gets paid off.
- Taxes are really just an expense. Our job is to reduce them as far as we can without breaking the law. Each asset you own is taxed differently. Some are tax-deferred. Some are tax-free. Some are taxed directly. Each tax treatment affects your cash flow and your balance sheet.
Your cash flow, balance sheet and taxes are different concepts, but it’s beautiful to see when all the holes are filled and everything fits together seamlessly and symmetrically.
Until next time, enjoy. Gary