In today’s telecommunication age, we have near instant access to all sorts of information, especially financial information. The more fantastic or sophisticated it sounds, the more viewers and readers it attracts. The (unconscious) message is that we need to be clever and cool with our money if we are going to be financially successful. If you just came into money, then you need to find the most esoteric investment strategy possible, that “only a select few have access to.” We encounter this kind of thinking quite regularly.
Has any of this helped us make better decisions with our money or improved our finances? The evidence would tend to say that, on balance, it has not. Sophisticated got us into a financial crisis, and the average American is riddled with debt and unprepared for retirement. Maybe Mr. Einstein and Mr. Buffett were onto something.
The basic truth is that we can do five things with our money: (1) save it; (2) spend it; (3) give it away; (4) pay taxes; and (5) pay down debt. Shake it up any way you want, and chances are it will end up in one of those buckets. It is not as sexy as talking about a hedge fund in an offshore trust, but it is truth.
Consider someone who makes $100,000 and has a priority of giving. If taxes are 20 percent, debt service is 20 percent, and giving is 10 percent, that leaves 50 percent to save and spend, or $50,000. If your retirement goals determine your need to save 20 percent per year, then your lifestyle will be left with $30,000. The percentages can be changed, but they can only add up to 100 percent.
Looking at money from the top down provides a big picture perspective. We can be more intentional and better align our priorities with our financial decisions. Change the percentages but do it on purpose. Except for a rare few, we all have a finite amount of resources. Unless we have an intentional plan for allocating it, it gets easy to default into lifestyle first, while the other four areas fight over whatever is left.
This simple exercise is also a good way to get family members on the same page who otherwise struggle to agree on financial decisions. Part of the problem in these situations invariably runs into the fact that you cannot do everything, but what can be done has not even been defined. Putting those five buckets on a legal pad is an easy way to create reality, or seeing things the way they are. When everyone is looking at the same reality, it is a lot easier to reach agreement without talking past each other.
Spend a few minutes at lunch or the dinner table jotting down your priorities and put them into the buckets. It does not need to be exact. I think you will find the more you think about it some interesting things will come out of it, and maybe even some rewarding discussions. It is simple, but effective.
