THE SIX “P” FORMULA: Proper Prior Planning Prevents Poor Performance
“Six P” or Cash Flow Planning merely means planning the flow of your cash to achieve your lifestyle targets. If there’s not enough money, then you need to rework your goals or increase your income (think side hustles). Personally, I view lifestyle goals as those things that are above and beyond regular living expenses. These objectives can range anywhere from special parties hosted by you to larger planned expenditures such as appliance replacements, an auto purchase, a home purchase or home improvement. It’s anything that is not essential to your day-to-day living and cannot be attached to your six months’ expenses account, which is untouchable, except for EMERGENCIES.
Typically, lifestyle goals are achievable once you have achieved Baby Step 4 (regularly scheduled installments representing 15% of your household income into a ROTH IRA or other tax-favored retirement plan). This means that you have successfully achieved Baby Steps 1-3[1], are actively working on #4, and now have extra cash flow available. (SIDE NOTE: Baby Step 4 will never end while you’re aggressively earning income…just sayin’, but that doesn’t mean you cannot jump to #5-College for kids or #6-Pay off your mortgage, once you start working on #4).
So, what to do with that extra cash? DON’T SPEND IT! That’s right. Just park it in an appropriately designated account. Long-term goals (5+ years) can be invested in a mutual fund, while short-term goals (under 5 years) can go into a savings account or money market. Fight the urge to splurge just because it’s burning a hole in your proverbial pocket. Instead, be mindful … plan. Look around your life. What will possibly need replacing or repair? A car, kitchen appliances, furniture, new mattresses, minor repairs? Once you have identified the future need(s), shop the costs and start your cash flow to cover the item(s). Goal achieved means money has been saved and is ready for action when YOU say it’s time. You own the expenditure; it doesn’t own you.
Next on your cash flow list, what do you WANT to do/buy? Trips, major home improvements, adoption, elective surgery, start a business? Go for it. If you effectively include it in your financial plan, you can realize the goal on your timeline.
During my childhood, my parents would organize a pretty intense summer vacation, every four years, to an extraordinary part of the continental USA. It was extraordinary for us because we lived in South Florida. They chose that cycle to allow time for the cash flow plan to build successfully. When I was 10, my Dad decided it was time for me to take on the exercise of “developing” a budget for the family vacation (much like National Lampoon’s Family Vacation) from our South Florida home to Disneyland in California. It was to be a 4-week event with my parents, my sister and me. I had to research the price of everything including gas, lodging, food, tickets, and even an emergency fund. We didn’t have the internet back then, so my Mom drove me to our local AAA Office to obtain various booklets/brochures, which gave excursion ratings and travel costs within the continental U.S., including maps, which reflected the best suggested routes from point A to B. Based on scheduled sightseeing desires and relative/friend visits we were intended to make, I formulated the itinerary, picked out the hotels, and arranged for daily gas and food. Even though Mom and Dad had already done their homework, they gave me this task in the Winter before the trip to teach me the value of time and money management, discussing with me each of my decisions for the purpose of fine tuning my why’s, how’s, and math skills.
What a proactive way to educate a kid, and what a fun project! I not only learned how to read maps, but also how to find the best deals and where to cut costs. Budgeting (time and money) became a game of sorts: to accomplish all we wanted to see and do, breakfasts were always in our hotel room (milk, cereal, juice) and lunch was a picnic at either a National Park/Monument or on the side of the road. This meant grocery shopping every few days while traveling. Dinners were at the restaurant attached to the hotel/motel partly due to their patron dining deals and partly because we had nowhere to cook. Upon arriving at our destination, we could live a little. We budgeted for slightly more upscale dinners, lunch at Disneyland (!!), and souvenir purchases. At one point, we got a flat tire, but it was just a momentary disruption, because we had the emergency fund ready for such an event. During our visit to the Grand Canyon, I acquired debris in my eye, which meant a trip to the local hospital. However, Mom and Dad had the funds to pay for the ER visit. No financial anxiety, just mere inconveniences that turned out to be adventures and memories. It was a great lesson and one that reawakened my financial planning senses after my divorce.
And honestly, isn’t that the goal here…to operate from a place of Financial Peace, not financial panic? While you’re at it, make memories and include your family in the process. Learn to plan, learn to teach, learn to listen, and occasionally, give up social media to improve your family’s communication skills. Above all, learn to navigate within your own budget. Your future life depends on it.
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