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Semi-Retired

How to Be Semi-Retired: Part 5 – Cash Flow

Posted by kdadmin on October 31st, 2015.

How to Be Semi-Retired: Part 5 – Cash Flow

Now that your have your Plan A, and you’ve thought through you Plans B through LMNOP, you’re ready for Part 5 – Cash Flow. If you’re new to this series, start at How to Be Semi-Retired, Step One.

Now, Part 5 is all about cash flow. Money in, money saved, money out. I wouldn’t say it’s the hardest part, but it’s the most brutally honest part. It’s also where most people fail, because they approach cash flow, from a self-shaming, belt tightening perspective. This is counter productive, and never works.

I once had a friend, Bob, who was spending about $10,000 per month for the lifestyle to which he and his family had grown accustomed. Bob openly accused his wife, Linda, of unfairly spending much more money than he got to. Linda was very defensive. He said Linda was always buying this and that for the kids, or herself, or crap for the house, etc. So I asked him, in front of Linda, who took care of the kids while he was at work. Linda. I asked who ran the household. Linda. I asked who planned the vacations. Linda. I asked who drove the kids hither and yon to all of their activities. Linda. I asked who took care of repairs for the house. Linda. So, I bluntly pointed out that of course Linda was spending all of the money. She was doing all of the maintenance work, all of which costs money. Bob had never thought of this. Bob ate some crow that day.

But more beneficial was that Linda didn’t WANT to spend all that money. She thought many of the things that had become part of their routine were wasteful, unnecessary, and counter productive to the life that she and Bob had wanted to live when they started out together. So, instead of taking out their budget, and bickering about what should be cut, they simply started over.

A Clean Sheet. This is the best way to create your cash flow plan. Take out a clean sheet of paper. Write down all of the things that you’d want to spend money on to live out your Plan A. Not for the first year when you’re getting all settled in, and have the big moving expenses, but for the maintenance years. How much, REALLY, would you want to spend, each year, to Live the Life You Love, forever? For most people, it’s usually far less than they are spending now.

Take Bob and Linda’s case. When they went through the exercise, they discovered:

  1. Neither wanted their huge house.
  2. Neither really cared about their expensive cars.
  3. Both had independently come up with a very similar Plan A; but Linda wanted to use her extra time and money to quilt, whereas Bob wanted to sail.
  4. Both were bored with their Disneyesque vacations.
  5. Both wanted a slower pace, in a smaller town, close to the ocean, where they could live their dreams, while their family was still young.
  6. Both felt they were setting bad financial examples for their kids.

So, they made a list of what they thought it would cost to Live the Life They Loved.

  1. They wanted a smaller house. Mortgage payment $1600/mo (savings: $2600/mo)
  2. They wanted simpler cars. Car payments $600/mo (savings: $1200/mo)
  3. They bought a sailboat.$300/mo. They bought a Berninaquilting sewing machine(pictured above). $300/mo. (increased expense: $600).
  4. They started using the sailboat for their family vacations. (savings: $1,000/mo)
  5. They increased their retirement savings by $20,000/yr, reducing their taxes. (savings: $500/mo).
  6. They used the results of their financial process to illustrate the power of choice with their kids. (priceless…)

Now, at the end of the day, Bob and Linda had managed to save roughly $4700/mo, cutting their expenses nearly in half, but did it in a way that brought them closer together, closer as a family, and closer to their individual life dreams. THIS is the power of using money intentionally, to achieve your Plan A.

Pie in the Sky. Sure, this may all sound fine and dandy, but it will be messy. When Bob and Linda stopped keeping up with the Joneses, made conscious decisions to change their lifestyle, changed hobbies, moved, and disconnected from the frenetic lifestyle they had been living; they got some serious push back. From friends, from family, from coworkers, from retailers, even from “the man on the street.” Everybody seemed to think that Bob and Linda were crazy for being intentional with their money. Everybody knew why Bob and Linda would fail. Everybody had an opinion, or a bit of shame about how Bob and Linda’s choice would mess up everybody else’s lives. It was annoying to say the least.

But Bob and Linda pressed on. They had done the research, they had done the math, and the notion of being able to Live the Life They Loved, right now, while their family was still young, was simply too compelling to pass up. So, they did it.

Plan B through LMNOP. Sure, there were some set backs. The house and cars took longer to sell, the new sailboat had a few more issues than expected, the new neighborhood operated at a much slower utilities pace, remote working could be a huge pain in the ass, moving wasa struggle, they had far more stuff than they thought (downsizing was a nightmare), and some friends had been so obnoxious about the changethat the relationships had been permanently damaged. However, waking up in their little house by the sea, being able to Live the Life They Loved, now, made it all worth it.

Show Me The Money. Now it’s your turn to make your own clean slate. Put away the spreadsheets, and the complicated cluster bomb of personal financial software. Use the following approach:

  1. List all of your income. Total it up.
  2. Take out your Plan A from Step Four, and sketch out a rough list of what you think it would take to live it.
    1. Go broad stroke with the more major expenses first (housing, transportation, hobbies, family, schooling, charity, taxes).
    2. Then move into the more basic things that will be present wherever you are (utilities, food, shoes, medication, etc.).
  3. List your major first year expenses (down payments, association fees, membership dues, remodeling, etc.).
  4. Compare all of this to your current expenses.
  5. What current expenses you leave out of your Plan A list? What does that tell about what you value and what you don’t? Write down your thoughts. Set it aside.
  6. In three days, get your clear vision of your Plan A in your head, and repeat steps 1 through 5.
  7. In three more days, get your clear vision of your Plan A in your head, and repeat steps 1 through 5.
  8. Compare all of your notes.
  9. Write down a solid first draft of your income, your major expenses, your minor expenses, and your major first years expenses.
  10. Sit with it. See what you think.
  11. Mull over how you could make it happen.
  12. List your biggest hurdles.
  13. Start to get excited.

Honestly, Part 6 is where this gets REALLY exciting. Because, in Part 6, we’re going to actually put this plan into action; covering the HOW of merging your Plan A and your Cash Flow Plan into the first few days of BEING Semi-Retired. We’ll flesh out Bob and Linda’s example, and identify your first few steps.

As a bonus, if you send me some of your biggest hurdles, detailing the issues, I’ll include them in the next segment, and offer some solutions.

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