Strategy vs Tactics
To start off, I think it’s important to clarify why I’m asking what your strategy is for these various topics.
Strategy is defined as: a plan of action or policy designed to achieve a major, or, overall aim.
I would consider “retirement”, college savings, legacy, financial freedom, start a business, etc. as a major or overall aim, wouldn’t you?
Tactics is defined as: the art or skill of employing available means to accomplish an end.
Similar, but different. Strategy is more of the big picture, while tactics are the methods used to accomplish the big picture’s goal. This is important because tactics can and will change, while still trying to accomplish the same strategy. When it comes to investing and navigating our financial lives, the strategy is how and why you are investing, while the tactics are the specific methods employed to achieve the goal.
Both are important, but the financial media would rather have you focus on Walmart vs Target rather than should you pay off a mortgage now or later, or invest in that piece of real estate, change jobs, or start a small business, for example. Over these next few articles, I will lay out a few questions for you to ask yourself the next time you sit down to look at your finances, and hopefully develop a more thought-out strategy (or develop one in the first place) for each area.
What is your strategy for Cash Flow?
If we are going to start anywhere, it may as well be at the bedrock of everyone’s financial lives. Where does your money go? We all know the basics; don’t spend more than you earn. Simple, but not always easy. Until that is taken care of, nothing else matters. So the next step, where are those extra dollars going?
They say you can tell what a person values most based on where they spend their money and their time. Are your dollars being used efficiently? Are your dollars being put to work towards things that will enable you to do what you truly value?
That’s not to say every single dollar is going towards them, as we all have lives and various guilty pleasures, but have you sat down to see if your dollars are being given a job? Is enough being put towards various investments to ensure your financial freedom and comfort? Or, are you more than covering the required amounts, and want to see if funds can be diverted to other things, such as family trips, charitable intent, or other personal endeavors?
Staying disciplined with your cash flow opens up many doors since great opportunities are fleeting and if you aren’t in a position to capitalize, they drift away. Whether it’s starting the business you always wanted, taking that amazing trip, or building your dream house. Retirement (tax-advantaged) accounts are a piece to the puzzle, but there are certainly other methods out there if you are so inclined (real estate, business ownership). All of them require diligent investing, research, and strong household cash flows. Having funds ready to go is only an enabler, never a disabler.
What you can do today to Master Cash Flow
- First, you need to know how much you are bringing in, and how much is going out. This is the least fun part, but the most important.
- Second, once you figure out your spending/income, determine how many months of expenses you want to have in an emergency reserve. Three to six months is common, but if you are self-employed I would recommend having 12 months of expenses as a buffer.
- Third, set up automatic payments to your savings accounts to happen early in the month. This removes any temptation for using “leftover” funds at the end of the month for things you don’t necessarily need.
- Lastly, get some help! Money can be intimidating, especially since very few of us were taught about it growing up. Consult with an advisor, or another third party to help stay on track. I also recommend using software to help track your cash flow. YNAB (You Need A Budget) is a great place to start and will help you in determining how much is coming in and out monthly. People are usually surprised at how much is going towards things they don’t really care about.