Money is the leading cause of stress in America, the leading cause of divorce in America, and doesn’t rank in the top five factors that lead to happiness. Yet we all need it to live to one extent or another.
While money is a part of each of our life equations, it’s not ultimately part of our happiness equation. Money is a means to an end. In order to be free from the hold that money can have on us, we must have a plan and understand how money works.
With longer life expectancies and Baby Boomers wanting to stay purposefully engaged in their vocation longer-term, the term “retirement” has been redefined. It’s no longer a function of handing in your notice, planning on 5-7 years of golf and shuffleboard, and then calling it a life. It is about having the choice to keep working, quit working, rebalance the ratio of work to leisure, or start a second career
This is the time in your life when your money, time, and talents are most negotiable–when your assets create an income stream that allows you to replicate your lifestyle without the need for an earned wage. Ultimately, the flexibility to do what you want, when you want, without the constraints of money, is financial freedom.
Five Uses of Money
One of the ways we help clients achieve Financial Freedom is through the use of a tool called The Five Uses of Money. Let me explain:
If you boil it down, we like to think there are five ways to “use” money:
- You can GIVE it away.
- You can pay DEBT.
- You can pay TAX.
- You can save or INVEST
- You can LIVE off it.
The LIVE category is our “catch-all” which replicates your current lifestyle. Rather than tracking these expenses by hand, we utilize a tool called, coincidentally, The Five Uses of Money, to back into your living expenses using other figures that are easily-accessible. The illustration below demonstrates:
Most people know or can quickly find what they give away, pay in debts, and invest on a monthly basis. If you don’t have your marginal tax rate memorized (most don’t), Fives Uses can estimate what you pay on the federal and state level.
After gathering the necessary data, we compile it into easy-to-read charts as pictured by the example below:
There are many uses for this tool, but here are the two most popular:
- Where is my money going? As we mentioned, it can be tedious to track how every dollar is spent. With this tool, not only is it easy to find where your money is going, but also many clients are startled when they see their spending broken down; however, it often motivates them to save more and spend less.
- Finding the Balance – Most people would like to maintain the same lifestyle they are living now in retirement. Five Uses can determine if you are currently investing what is needed to be on the proper trajectory to recreate that same spending in retirement when accounting for inflation, investment returns, Social Security, and more.
The Five Uses of Money tool is powerful at filtering through the messiness of personal finance and getting to the bare bones of what you’ll need for Financial Freedom: Am I saving enough to recreate the lifestyle I want? Whether you are 25 or 65, this program can benefit you.
After going through the Five Uses exercise, we find that not only can this provide confidence for the future, but it may also empower you to live and give more in the present – which, after all, isn’t that what Financial Freedom is all about?
All graphs and figures in this document are for example purposes only.
The Five Uses of Money concept is courtesy of Ron Blue and Kingdom Advisors.
Ron Blue Library LLC 2021
All worldwide rights reserved.
Used under license by Kingdom Advisors, Inc. 2021
Clicking on the links above may result in you leaving the Pittenger & Anderson, Inc. website. The opinions and ideas expressed on these external websites are those of third-party vendors and Pittenger & Anderson, Inc. has not approved or endorsed any of this third-party content. For the full Terms & Conditions of using the Pittenger & Anderson, Inc. website, click on this link.
Pittenger & Anderson, Inc. does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Additionally, the information presented here is not intended to be a recommendation to buy or sell any specific security. To learn more about our firm and investment approach, check out our Form ADV.
Click here to download the PDF version of this article.