It is important to understand your cash flow; you want to know where your money is going. For the purposes of financial planning, categorize expenses into boxes A, B, and C. This process serves as a tool to help manage spending and saving patterns.
Box A contains necessary expenses such as:
- Utilities, etc.
The more expenses you allocate to this box, the less money you will have for the other two boxes.
For those enjoying sunny Southern California, Box A can take up a large part of a family’s budget. This is because the Golden State has a high cost of living. The desire live in a safe neighborhood, with good schools, can further exaggerate the cost of these monthly expenses.
It is important that you enjoy your life. That is why Box B is meant to account for your entertainment. These are recreational activities that you enjoy such as travel, hobbies, clubs, etc. Box B plays an important part in The Two Rules of Retirement.
You have medium- and long-term goals. In Box C, allocate assets that will help you reach those longer term goals, such as retirement security, college tuition, weddings, new vehicles, etc.
We are of the belief that high quality lives are often secured in Box B and Box C. Many people will over extend themselves in Box A. Consequently, they have little money left over to enjoy their life journey. Take a step back to conceptualize how you are spending your money. Examining spending through the paradigm of the three boxes may alter one’s approach to spending.