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Horse Then Cart

Jesse Cramer

MONEY CONVERSATIONS are part of my daily life. I’ve written a personal finance blog for five years and recorded a related podcast for three years. I work full-time for a fiduciary financial planning firm. All of these activities expose me to folks seeking to improve their financial literacy.

I love talking money. But the more “money talks” I have, the more I see that people overlook the most fundamental principle of personal finance. What principle? No, it isn’t about investing, which gets endless attention.

  • “Should I invest in stocks? Which companies? What’s going to happen in 2024?”
  • “How much should I put in my 401(k)? What about my Roth IRA?”
  • “Are 529 accounts worthwhile for my kids? What about health savings accounts?”

These are good questions. If you don’t know the answers, you should—eventually. Taxes are the next most popular topic. Most people hate taxes and want to minimize them.

  • “We earned way more income this year than we expected. Any tricks to reduce our tax bill?”
  • “I’m retiring soon and worried about required minimum distributions. How do I go about tax planning?”

I get it. Taxes are a vital component of financial planning. But taxes, investing and most other “catchy” financial topics put the cart before the horse.

Financial newbies are bombarded with a plethora of catchy online financial content. Understandably, they get the false impression that these catchy topics are what they should focus on. Don’t believe me? Just ask a GameStop investor.

So, what’s the mysterious fundamental principle they should focus on instead? It’s cash flow. Yes, it’s a boring topic. But cash flow is the foundation of everything else in our financial lives. All those catchy topics—investing, tax planning, all of it—come after you understand your cash flow.

What do I mean by cash flow? It’s simply your income minus your expenses. When experts evangelize that you should “spend less than you earn” and “pay yourself first,” they’re preaching the gospel of positive cash flow. When they suggest you budget and track your expenses, they’re asking you to measure cash flow.

A negative cash flow has an inevitable—and painful—floor. You’ll run out of money. You’ll go into debt. Or go bankrupt. However you define it, you’ll achieve financial failure. None of us wants that.

Charles Dickens made this point in his novel David Copperfield, where the character Wilkins Micawber states: “Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Your index fund portfolio is funded by positive cash flow. Ditto for your two-week trip around the Caribbean. Those fun topics follow from healthy cash flow. 

How do we measure cash flow? Up until last year, I used the app YNAB. I still think YNAB is the best budgeting app out there, and I’d recommend it before any others. But when we married, my wife and I wanted to combine finances. We settled on a simple Google Sheets spreadsheet. We update the sheet every month with our current account figures. That allows me to do month-to-month comparisons and measure our monthly cash flow.

Without this kind of measurement, I’d be lost—like the couple I spoke with last year. They knew their income, which was $10,000 a month. They assumed their expenses were roughly $7,000 a month. Result: They had monthly positive cash flow of $3,000, right?

My prior career was in aerospace engineering, so I like to check my math. I asked this couple, “If we look back at your bank and investment accounts over the past year, can we see roughly $36,000 in contributions? That would be $3,000 a month for 12 months. If we see those contributions, we’ll know that your cash flow measurement is accurate.”

Can you guess where this is going? The money wasn’t there. None of it. Their accounts showed no measurable growth over the past year.

You might be wondering, “How can that possibly be? How can someone be missing $36,000 a year?” It’s always the same culprit. Always. They assumed they knew their expenses, but they were wrong. Garbage in, garbage out.

  • Perhaps they measured poorly or didn’t measure at all.
  • Perhaps they created a budget before spending but never tracked their real spending after the fact.
  • Perhaps they accounted for typical monthly expenses, but forgot to include big, one-time expenses. Your $10,000 family vacation is quite real, even if it’s not a monthly expense.

A poor understanding of your spending is nearly impossible to overcome. One of my blog’s readers confessed to me that his annual income had been roughly $400,000 for 10-plus years, but he had barely saved beyond his 401(k). How can someone with $4 million in income over a decade not have an after-tax penny to show for it? There are only two options: He either misunderstood his income or misunderstood his spending.

We rarely have a poor understanding of our income. Income comprises one or two transactions per month. It’s easy to track. Do you know anyone who has no idea what his or her salary is?

But spending involves dozens of transactions per month. Measuring that spending is tedious and easy to mess up. It frequently forces us to face painful conclusions like, “The Peloton has spider webs on it. We haven’t used it in three months, but we’re still paying for it.”

It’s not fun to face that music. But you can’t manage what you don’t measure. You need to understand your spending to know your cash flow.

It strikes me that I might be preaching to the choir. “Jesse, this is HumbleDollar. We’ve been around the block. We know our cash flow.” But I also know many HumbleDollar readers serve as financial guides to others.

Our friends, family and colleagues know we’re “money people.” We get peppered with questions about target-date funds, Barron’s cover stories and the latest yawping from Jim Cramer (no relation, I repeat, no relation). So maybe, just maybe, the next time your cousin asks you about GameStop, tell him: “Not to dodge your question, but let’s not put the cart before the horse.”

Jesse Cramer is the pen and voice behind The Best Interest, a blog and podcast. After a decade in aerospace engineering, Jesse switched careers and now works with clients at a fiduciary wealth management firm in Rochester, New York. Jesse enjoys reading, racket sports, and fostering dogs with his wife. 

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