Want content like this in your inbox each week? Leave your email here.
Fruit Crop Season
Money Two Ways: Balances and Flows
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.
Want content like this in your inbox each week? Leave your email here.
Play the audio version of this post below:
Money Two Ways: Balances and Flows – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
Rocks, Pebbles, and Sand
I recently heard the simple lesson about rocks and pebbles and sand again. You probably know it.
If you take an empty jar and fill it with rocks, you can still add pebbles and shake it until it is full again. Then you can fill it again with sand. The pebbles fit in around the rocks, and the sand fills in around the pebbles. Everything fits.
But if you empty it the jar and try to refill it first with the sand, then the pebbles, and finally the rocks, it comes out differently. The rocks will not all fit.
The moral of the story: focus on the big things, and do not let the little things get in your way. We each are happier and more effective when we have thought about our priorities and acted on them first. When we have time to take care of less important matters when they fit in. When we aren’t focused on little things that just bog us down.
We have rocks – priorities – in our personal lives, in our relationships with others, in our work or business. Our best lives may be when we can put all of our rocks from all parts of our lives into the jar, thinking about priorities and taking action. And keeping the sand out of the works, no matter the source.
Narrowing the focus to you, what are the rocks in your financial plans and planning, the big priorities? Let’s work on them first, and get to the fine points later.
In our work for you, the rocks are doing our research and taking care of portfolios, handling the service you need so your money connects to your life, and communicating with you every way we can.
Rocks – pebbles – sand. Clients, if you would like to talk about this or anything else, please email us or call.
The Fruits of Investment
Imagine for a moment that you are a simple farmer cultivating a modest but lush orchard of apple trees. Every year you reap a bountiful harvest of fruit to feed your family, with some surplus to sell for other foods and necessities you can’t grow yourself.
Every once in a while your neighbor comes by and offers to buy all your trees for firewood. Even if he offers you a generous price, accepting it would be foolish: the money you could sell it for would sustain you for a while, but it would not produce new crops for you year in and year out. It would run out where a well-tended orchard could keep providing for you long after.
One day your neighbor comes up to you in a bad mood, still wanting to buy your trees. The timber market has been flooded with cheap wood, cutting into their profits, so now they can only offer a much lower price for your trees.
If you wouldn’t sell your orchard when the price is high, why on Earth would you want to sell it when the price is low? As long as you plan to keep your orchard and live on your fruit crop, it shouldn’t matter to you what price someone may quote for it.
For those of us planning to retire on our investments, we would do well to heed the parable of the orchard and the fruit crop. Many retirees plan to live on a portfolio of income-bearing investments. We know that investments are subject to volatility, and at some point in your retirement you will probably see price swings in your investments—even government bonds and other conservative investments are not immune. But your ability to pay bills and buy groceries doesn’t depend on the market value of your holdings, it depends on the dividends and interest payments they generate. As long as your “fruit crop” is secure, you have no reason to sell your orchard. Therefore it doesn’t matter what someone wants to buy it for.
Investors, like farmers, sometimes suffer crop failures—there are no guarantees. But it is the stability of your income that should concern you first and foremost, not the stability of your price.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
Play the audio version of this post below:
The Fruits of Investment – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
You must be logged in to post a comment.