I use these 3 C’s of planning doing financial planning all of the time, but they really apply to ANYTHING you (or your business, or your family, or…) is planning for.
If you want to put context around any question you have with a dollar sign attached to, start by jotting down the 3 C’s:
- Cash Flow
Calendar – aka the timeline, aka what happens to who and when
Cash Flow – aka the budget, aka surplus/deficit analysis, aka how much came in versus how much went out
Crap – aka BS, aka balance sheet, aka what you own versus what you owe
I like to think I learned this from studying financial statement analysis, but it’s basically middle school stuff.
You have a dance on Friday. You pocket some lunch money on Monday because you’ll need Binaca to have a shot at some smooches. Thursday you stop in the convenience store and they’re out of Binaca but at least they had Big Red. Friday you show up, strike out, and you and your friends bust each other’s chops the whole walk home. On the bright side, there’s another dance in 2 weeks.
The calendar drives the cash flow decisions which influence the crap you own OR owe.
It plays out all through life. You can zoom in or out as far as you like – to the dance on Friday or to the next generation’s wealth.
Start with the timeline of events. Write out the stuff you KNOW is going to happen, and feel free to flag the stuff that might or could happen too.
The budget is going to change across the timeline. Sometimes you’re saving, sometimes you’re borrowing, but note how it adjusts in response to events.
The surpluses and deficits at each point in time determine what you own and what you owe. Because you’ve got your calendar, you can know how to think about your cash flow going forward, and use that knowledge to stay on top of your crap.
The way life actually unfolds may not be easy, but the 3 C’s give us enough context to always cobble together a sound, forward-looking plan.
Bonus Homework! Spot the 3 C’s in each:
You need a car because the hoopty you’ve been driving requires you to refill all of its essential fluids every morning. You don’t have the time to save for the full cash purchase, but you can save for the down payment required to get a loan. You trade in the old beater for the new beater and extra savings for new loan payments.
Your kids are (theoretically) going to college and you (theoretically) are going to someday retire. You can borrow for college, but not retirement, so you’re fully funding the 401(k), partially funding the 529s, and hoping you can use a Home Equity Line of Credit to cover any shortfall.
You’re about to sell your business for more money than you’ve ever seen at one time. You’ve seen the tax bill and set up the trusts to hopefully keep your kids from being THOSE kids. You’re not exactly sure what you’re going to do when you’re not working 80 hours a week, but you are (mostly) sure you’ll have enough of a nest egg to replace the income the business is throwing off. The responsibility, excitement, and stress has never felt heavier.
You know the promotion is coming, and you know she deserves fine, pretty things to wear, so you charge it. The money will eventually come in to pay it off, and then, the layoffs hit. The income isn’t there to service the debt and the assets aren’t there to lump it off. It’s time for some serious restructuring of finances and life.
The family beach house needs maintenance and your two siblings want to sell. You want the family beach house – the one your parents got from your grandparents – to get passed to your kids and grandkids (and you thought your nieces and nephews too, but your siblings haven’t been as lucky as you in their careers). You figure if you borrow against your house you can probably buy them out and still make college work, but retirement will take a back seat for a few years. Which priority is going to mean more to you while you’re here, and them when you’re gone you wonder.
*Seriously – recording these videos/podcasts makes me feel like even more of a broken record than I assume I am on the phone/in meetings all day. Here’s me talking about goals-based planning and the 3 C’s: