Happy day to you. This is Ken Kaufman, and I am thrilled you’re here for episode number 38, Income and Cash Flow Planning. Now, we’ve spent the last two episodes laying the groundwork for building a financial plan. Step one was to establish your baseline or your starting place as of right now, today, with a net worth statement and cash flow statement reflecting your current situation. Step two is about looking forward to your desired situation, where you’re building out what your dreams and your goals and your priorities are for the future. It’s what you’re shooting for, and it gives the framework for building a financial plan to try to accomplish these important things out there in the future. And so, today, we roll into step three, which is where we’re really gonna focus on income planning.
You need to sit down and take the time to make your best estimates of what you think your income will be for the rest of your life. Now, before you get overwhelmed by this, let me help you realize the data that you currently have to get started with the process, it’s gonna be easier than you think, and then how to go forward with what you currently know and put some projections out into the future. Before I jump into those details, let me explain why I think I can add some value and some perspective to this process. I think I’ve had just about every type of income that’s available, every type of arrangement that’s possibly out there through different jobs and really career types and changes that I’ve gone through.
So it all started for me working as an independent contractor as a baseball umpire at 16 years old, and I was paid by the game. Then I worked hourly at a metal forging shop the summer between graduating from high school and starting college. And wow, I’ve never worked harder and never perspired more in my entire life. Possibly, that was the one experience that told me that maybe physical manual labor was not going to be the best option for me from a career or a profession. Nothing against that, but wow, I just was so exhausted and tired at the end of every day and just worn down.
Now, after that, I had almost three years of no income. I didn’t work my first year of college, and then I served a two-year volunteer mission where I actually paid to be on the mission, and there was no compensation of any sort. Then, when I got back from my mission, I worked for a couple of months teaching missionaries who were about to go out and do the things that I was doing, and I was paid hourly. Then I worked for Fidelity Investments and then another broker-dealer through the rest of college, where I was paid hourly and sometimes time and a half or double time to work holidays and cover different shifts and different things like that. So I learned a lot about the value of the hourly rate and the time and how all of that worked.
Now, at the same time that I was graduating from college, when I left the hourly job at that broker-dealer, I started a business, and there was no more trading time for hourly pay. I had to actually produce to make money, and I failed. My business venture failed, and I made almost no money in six months and realized that I was on the wrong path. And I didn’t go about launching this entrepreneurial venture very well, and, like I said, it struggled, and really I had to stop pursuing that. And so I got my first real, what I’d call, post-owned undergrad job. I was salaried. I received a few promotions and probably was given too much responsibility or more responsibility than someone as young as I was. I think I handled it fairly well, but wow, I learned a lot. I made lots of mistakes, and luckily, I had people around me that were supporting me and helped me through a lot of that and helped me learn and grow a lot professionally.
Then, after doing that for about five years, I went back to grad school, and I gave up this progressing professional life that I had. And I worked some hourly jobs while I attended MBA school full time at the University of Georgia. And the most notable side job I had besides the teaching assistantship that I had on campus was running a food and concession section at all of the Georgia Bulldog home football games. That was a lot of work, a lot of fun, and it was just interesting to learn SEC football and see what all of that was about, and got to see some behind-the-scenes parts of it. Really interesting, a lot of fun, made a little bit of money. You’ve heard this story before. During this experience, my wife and I were doing everything we could to try to go through that experience and not incur any debt. So that was part of how I contributed to us trying to achieve that financial goal.
Then, after the MBA, I got a salary plus bonus job that lasted about a year, and then I moved on to my first executive role, salary, and bonus. And then I started a consulting business from there, and I was self-employed, really making my second attempt at entrepreneurship, and it went fairly well for about five years. As I look back, I would probably do some things different and think through some things differently and handle some situations differently. But a great learning experience, earned a good income for my family during that time, and then I had a client that really wanted me to come in-house. And so I took an executive role there, and through the years, since then, I’ve always had a side hustle or self-employed income coming in just from some of these clients and from some of these things that I was doing where I’ve continued to help some of these other entrepreneurs and businesses over the years.
Once that company that I went into full time in that executive role sold and some time passed, I moved to another organization, and then I moved to another organization where I’m at now in an executive role where I’ve had self-employed income and W-2 income coming in. So you can see, there’s lots of changes in jobs and roles for me, and throughout this time, there’s been a variability in my income. And it’s not that it’s just gone up and up and up. It’s had times where it’s been higher and other times where it’s been lower, just based on the circumstances, and taking some risk on some different things, and having equity, and everything that goes with that.
Even with that variability, I still did the best I could to plan what was gonna happen with my income. And as things changed, then I would quickly input that into my plan or iterate my plans so that I could then start to see how was that going to impact my long-term goals. Remember the goals and dreams and priorities that we did in the last episode and that you built out. And made all those changes accordingly.
And here…so with all that as the background, and just so you get a little bit of a flavor for how I’m approaching this, I really want you to start this income planning process with thinking about your current sources of income. And it should come off of that baseline cash flow statement from the last episode, where we talked about you creating those baseline items…or I should say two episodes ago. And there’s really two types of income to think about. The first is active income, and the second is passive income. Active income is any place where you are working, trading time for compensation or for money. So you’re putting effort and time into something, and it’s producing an income in exchange for that. The second source of income is what’s called passive income, and that’s where whether you put any time or effort in or not, there is a steady flow of income that’s coming in.
I’m gonna start with active income first, and again, this is where you’ve got a job or a cause or an organization that you’re involved with and you’re committing time and devoting time to whatever this is. Maybe you’re teaching music lessons or think of anything where you are trading time for money. It can be a full or a part-time role. Maybe there’s a side hustle involved, maybe you’re paid hourly, maybe you’re paid salary, maybe you’re paid all on commission, maybe there’s some bonus element to what you’re doing, and maybe you’re in a self-employed role or even an independent contractor role. It’s important to distinguish which of these are in play, because there’s different tax consequences and other factors to consider when you’re building out your plan.
For example, if you have W-2 income and you have access to employee benefits, then you may be purchasing health insurance or other things at a lower cost or able to contribute to a retirement plan that has a match. And so you’re gonna be able to accelerate possibly the dollars that you’re putting in, because you’re getting an immediate return from the employer match that’s going into it. There’s a lot of different elements, so it’s important to delineate what you are projecting or thinking that is going to be the source of that income, because that is going to inform the rest of your planning, as we will get into in future episodes. The key point here is make your best guess and then be prepared to make changes and iterate along the way, just like I had to. I’ve had to iterate and make a lot of changes, and my wife and I have had to adjust as my situation, and how we’ve approached the next opportunity, and how we’ve had to iterate and adjust throughout that entire process.
The second type of income that I wanna talk about is passive income. This is money coming in that requires no time or effort on your part. Perhaps you have a trust fund just kicking off cash to you each month. Well, probably not, but there are some people out there that are like this. Or maybe you made a great investment earlier in your life, and now it’s providing income to you, and it just shows up whether you do anything or not, whether you go to work or put any effort or not. Needless to say, this is usually coming because you have an asset on your balance sheet, your net worth statement that you created. So going back to that step in this process, when you build your baseline net worth statement, this is where you start to plan out how your assets are going to grow in the future, and you get to estimate how much income those assets are going to start generating on a passive basis too and what the timing of that is. And it could be any number of things.
One of the more common is people that get into rental income, where you purchase a home, and maybe you live in it for a period of time, and then you stop living in it and start to rent it out, or maybe you Airbnb that home out, and it starts to provide rental income. Now, maybe there’s some effort you’ve got to put in because you’ve got to find tenants or interact with people through Airbnb. Maybe there’s some maintenance, and so you mow the lawn and clean up after. People are either moving in or moving out. But the key thing is you have an asset, and because you own that asset, it’s starting to now provide you income. You could also sell it and have one big lump sum input of cash flow, which would require very little of any effort, depending on how you went through that process.
So as you plan out the rest of your life and you’re thinking about your income that’s coming from active sources, because you’re in there and you’re working, and then as you build up your assets on your balance sheet, you then are thinking about when are those gonna start creating cash flow and when is that money gonna come in. And ultimately, when people talk about retirement, the concept is, “Okay, I have enough assets built up that I don’t need to put my time in anywhere, and I’m gonna have enough income coming in to be able to pay my bills and accomplish my goals and dreams and priorities.” And so this process of income planning is so critical and super important, because it lays this foundation that allows us to see, now, what is the plan for income. And then, in the next episode, we’re gonna jump into, now, how does all the cash flow through, and what’s available to build assets and kinda help us accomplish certain things throughout our life, the life event fund, some of those things that I’ve already talked about in prior episodes.
The key thing here is a simple spreadsheet, list your sources of active income, list your sources of passive income. I would recommend doing it on an annual basis, so you could say 2019, 2020, 2021. And you can play that out into the future, and you lay out what’s gonna happen to income. It could be that you have the same W-2 job, and you just get a salary increase of 3% a year. Great. Maybe you’re gonna layer in some bonus or some commission, or maybe you think in a couple of years, you’re gonna start a side hustle, and that’s gonna generate another $5,000 or $10,000 of income to you each year. However you see it and however you wanna plan for it, and then once you create that plan, remember, according to Dwight D. Eisenhower, the plan is worthless, but the planning is indispensable. It then prepares you as you move throughout life and you are coming back and iterating your plan. It allows you to keep the planning process alive, make adjustments, iterate, and mostly, or I should say most critically, you’re looking to see any changes in iterations, is it negatively or positively impacting you accomplishing your objectives. And it allows you to then react and make adjustments as needed to keep yourself on track with your life plan, with what you want to accomplish, what you wanna help your kids and your grandkids accomplish, what are the most important things to you.
So there it is. That’s the basics of income planning. As I said, the next episode, we’re gonna get into the rest of this whole cash flow planning concept, how you’re gonna allocate and spend all this cash that’s coming in, how you’re gonna project that out and make assumptions about how assets are gonna grow, and ultimately, how all this is going to inform your financial plan. Many, many thanks to you for joining today. This is a wrap for episode 38. Happy day.
