What is up and welcome back everyone to another episode of the Long Game Podcast. I'm your host Thomas Koppelman and this week's weekly takeaway has a lot to do with goals. So when I sit down with people and we start to talk about finances, what I've realized is that most people lack direction. They have no idea what they should do with their money. They don't know if they should save it, if they should invest it, they should pay down their debt, how they should invest it. And what you need to understand is that this all comes down to not knowing your goals. If you sit there and say, I don't really know at all what I'm planning for, what my goals are, what's important to me, it is going to be impossible to decide what you should do with your finances. So if you're somebody that's lacking direction, at the start of this year, I want you to sit down with your spouse, by yourself, with with your family, et cetera, and think about your goals. Get really clear on them. Think short-term, mid-term, long-term, come up with goals. And then I promise when you go back and look at your finances, it's going to be a lot easier to decide what you should do with them. But understand in finance, it all starts with your goals and then you can make decisions on what to do with your money from there. Okay, so that was this week's weekly takeaway. But this week, what we're going to talk about is we're moving to a different section on the financial plan. So I started January really talking about business planning for two reasons. One, I already had a guest scheduled and so we are going to have to talk about business planning. I didn't want to just mix it in the middle. But two, you should be doing business planning at the start of the year. But now we're going to start going through the way that I present financial plans. And so this next section is really going to be all about cash. When I think about personal finance, the foundation for good financial planning is all about cash flow management. And there's really four variables that you need to understand to be able to manage your cash flow well. The problem is, is that when I ask people about these four specific metrics, they have no idea. They're actually not even close. The first one is what your income. This is what you make, what you take home on a monthly basis. Two is going to be your expenses. This is the one where people are the most off. When I sit down and ask somebody what their spending is, most times I find they're not even within 20% of the exact number they spend. That is why we actually, with all of our clients, go through and sort through their expenses to get that number. The third one is what you're gonna pay in taxes. Obviously, if you're somebody who's a W-2 employee, pretty simple, this one's a little bit easier than a business owner who has a sole prop or a partnership. And then the fourth one is going to be what your surplus is. And your surplus is just income minus expenses minus taxes gets you your surplus. The key to good financial planning is, you know, all four of these numbers. Again, it's your income, your expenses, what you need to pay in taxes and what that surplus is. If you don't know any of these numbers, then you're just guessing. So now let's go through each one to help figure out how you actually nail down these numbers. The first one's your income. Again, this is super easy if you're a W-2 employee. All you need to do is go look at your most recent pay stub. What is it that you take home per month? Let's say it's $10,000 per month that you take home. And then if you have a spouse and you'd want to look at theirs, let's say they make $5,000 a month. So now you're at $15,000 of take home a month. This is obviously not as easy if you are a business. Again, if you go back and listen to the earlier episodes as a business owner, you know, early on, maybe you don't have a set salary or set withdrawals that you take from the business, but let's assume it's later on and you do. Let's assume that you're paying yourself that same 10,000 number, right? That is the number that you want to look at. The next one is expenses. So this is one where I urge everybody to actually spend a little bit of time going to figure out what your expenses are. You can do it the old way. You can basically get all your receipts, log them in Excel, do it on paper. I don't think this is really the best way to do it. It's really tedious. And for most high income individuals, it doesn't need to go to that level. With our clients, we use Right Capital. If you are somebody that has less income and less surplus, you might have to get really granular here. You might have to see this goes to groceries, this goes to shopping, this goes to dining out, this goes to kids, this goes to X, Y, and Z because you don't have much room or margin for error. If you're a higher income individual, like the people I work with, all we really care about is what you spend on average per month. My recommendation is go back three months. This is what we do for all of our new clients. You can basically upload this to any software and typically they'll be able to pull three months of data, go through, organize it, make sure things that are transactions or transactions, transfers or transfers, income is income and make sure it's all correct. I promise you the guests that you're going to have about what you spend per month, especially if you're somebody who's spending 10 plus thousand a month, you're probably going to be wrong. And this is why it's important to get that data from there. I don't think you need to do this every month. My recommendation is, is that like every three, six or 12 months, you go sort through a few months of data, see what the numbers are and see if that's in line with you, what you want it to be. And the third one is your tax liability. This is pretty easy if you're a regular W-2 person, like I said, but we work with a lot of people who get paid W-2 and this is not easy. Think people with large bonuses, think people with RSUs. So oftentimes what happens is these people are in the 37% bracket that we work with, but on bonuses and RSUs, the payroll only ends up withholding 22%. So imagine the person we work with, they make a million dollars, 500,000 of that comes through as RSUs. Basically, that's just a cash bonus paid in stock. So what happens is if 500,000 of that comes through at 22%, it withheld at 15% too low on $500,000. That's a $75,000 tax shortfall. And this is why kneeling down your taxes is so important. What most people fail to realize is that withholding through your payroll is just a guess based on the information you gave it. So let's say you sit down and say, I'm married, I make a hundred grand. It's going to withhold based on that, but it might not know over there, your spouse makes a million dollars and it is significantly under withholding. It's good that withholding gives you a guess, but you still need to nail down your tax liability because if you don't and you go allocate these dollars, tax time is going to roll around. And one, you're probably going to owe penalties. And two, you're going to be wondering, how do I come up with $55,000 from the shortfall? If you're a business owner, you really should be working with a tax professional, somebody like our team who's going to give you tax estimates at the beginning of the year, middle of the year, or the end of the year. So you can actually be planning out what is your true surplus post taxes. The fourth number then we're going to look at is your surplus. So it's income minus expenses minus taxes gets you your surplus. Only from there can we actually start to think about how to manage your cash flow. For most of the people that I work with, and this is what I urge you to do as well, go back and say, hey, I'm going to take out some of the savings I'm doing. So when you look at this equation, you don't want to include your 401k past the match. You don't want to include your backdoor Roth. You don't want to include savings to your emergency fund or travel fund or to your taxable account. All those things are going to be decided on once we get down to this surplus number. Let's say we get down to it. Your surplus is $5,000. That is where we might go back and say, Hey, great. We have $5,000. Here's what our goals are. Are we on track for that? Right? Okay. Maybe we want to save 12,000 a year for travels. That's a thousand a month. Okay. We want to both max out our backdoor Roths. That's about a third, $1,100 a month. Okay. What else do we want to cover our kids college? So maybe that's going to be $500 a month. You know, you want to have your hierarchy of how to prioritize things, which we're not going to get into today, but you really need to get down to that last number before you figure it out. And now from here with cashflow, we have to figure out how to budget. As I talked about before, there are many ways to budget. I believe if you're somebody that has lower income in lower surplus, you need to do traditional budgeting. This means you allocate the right amount to the right category. You track it through the month and you make sure you don't overspend. But for the high income clients that I work with, this is typically not what I recommend. I recommend what's called reverse budgeting. Reverse budgeting, all it is, is that we automate our savings and investments first and we invest what's left over. But to do this well, you have to start off with this exercise we talked about. Income minus expenses minus taxes gets you your surplus. So let's use the example, You make 20, you spend 15, you have $5,000 of surplus. So what this would look like starting next month is you would go automate all of those savings. As the income comes in, you would do the 529, the Roth IRA, the emergency fund, all of the things you're just going to automate out right away. So that's $5,000. That's going to get automated. I get paid once a month. It makes it really easy. If you get paid twice a month, you might want to stagger when these are done. You might say, Hey, you know, my mortgage and other bills are the beginning of the month. So I'm going to do this in the second half of the month. You have to find the system that works for you, but automating it is the key to financial success. You know, when I first started out, one thing that I heard is permanent life insurance is amazing because it's a forced savings tool. But the reality is you can create forced savings anywhere today. That can be in your 401k. It can be your Roth IRA, your taxable account. It can be any of your savings accounts, right? You can build automation to do that. And so basically what happens is you say at 5,000 a month, some goes to savings accounts, some goes to investments, et cetera. And you just want to automate those dollars. I recommend using some high yield savings accounts for all the savings. I like Ally or Marcus. Basically, I can have a specific account with a specific goal with specific savings every month, and then I can set it to shut off once it hits a specific dollar amount. You know, at the end of the day, I think automation is the key to success. You will be amazed by how much more you will save and invest simply because you take you out of the equation. You don't think about, oh, the market's down or the market's up. I shouldn't invest. You don't think about, oh, it'd be nice to spend a little bit extra. You get all of that out and save right away. And this automation is what leads to really, really great success financially. And then the last thing to talk about is, well, how do I make sure that if I have a month where I spend a little bit more, I don't go under? What I believe is every checking account should have a buffer. How much you have as a buffer really depends on who you are and your own behavior. If you're somebody that's like, I am a great saver. I don't overspend. Then you can have a larger buffer. So if we go back to this person who's spending $15,000 a month, a lot of times I'll have them have the 15,000 plus one month of expenses, another 15,000 as a buffer in their checking account. Some people will say, oh my gosh, you have extra money and you're checking, you're not getting interest on it. To me, the ease of using, not even to worry about transferring, et cetera, is worth giving up a little bit of interest. If it's not for you, that's okay. You can have a lower buffer. But if you are somebody that is bad at spending, if you see a dollar, you spend a dollar, then the buffer is going to be the worst thing that you could do for yourself. So I would recommend that you typically just have one month's expenses at 15K, not the additional 15, or you have like 15 plus maybe like $2,500 or something small to serve as your buffer. I think as you've listened to this episode, you've probably understood that a lot of this has to do with behavior and knowing your numbers and knowing what works for you. After listening to this, I really hope you go nail down the numbers for yourself. You cannot create a financial plan or say that you are doing well financially if you don't know income minus expenses minus taxes equals your surplus. So go figure that out today.