There are two ways to think about money. It helps to understand both if you want to be comfortable financially.
Balances. Balances are what we have: the number on our investment statement or bank account, our 401(k) value, or what our Roth IRA is worth. Some think a certain total is required in order to retire, to be financially independent, or to meet some other goal.
Flows. Flows are the income and the outgo, month by month or year after year. These include recurring items like paychecks or Social Security coming in, travel expenses or utilities going out.
While these terms certainly work, one of our favorite analogies is the orchard and the fruit crop. The orchard is like the balance; it’s what we own. The fruit crop is the flow. We like to say that if the fruit crop is big enough to live on, we don’t need to worry what the neighbor would pay us for the orchard.
What does this mean? That once we’re ready for retirement, for instance, we pay more attention to flows than balances.
So if Social Security and a pension more than meet your cash flow needs in retirement—if the flows run a surplus—you might feel comfortable financially even without a fortune in balances. On the other hand, if you spend more than what’s is coming in, you may feel financially stressed no matter what your balances are.
One of the key elements of our work for you is turning balances into flows. We think about the size of our retirement accounts all throughout our working careers. But in planning for retirement, we like to figure out how much cash flow can come out of those retirement balances. In other words, how big of a fruit crop could your orchard deliver?
Clients, if you would like to talk about your balances, flows, orchard, or fruit crop, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
Investing involves risk including loss of principal.
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