Posted by André Nosalsky :: February 5, 2008 @ 8:10 am

In my first post, we determined that your financial life is in fact a system. Maybe a system in disarray, but we’ll look at that in the future. For now, let’s look at what makes up an “average” financial system. Here is what I’m assuming as a backdrop to this discussion: generating income of around $60,000 per year with the goal of retiring with $1.5 Million, and then putting that amount into a very safe investment generating 5% per year to produce approximately $75,000 per year in retirement. To see how to achieve that goal, let’s start by looking at the “processes” in everybody’s financial life.

Processes - You can think of processes as any type of movement of money, assets or liabilities. The processes of an average financial system are:

Money Inflow – Some examples include depositing a paycheck, receiving interest earned from a person-to-person loan on Lending Club, cashing a tax refund check, and having a friend return the $20 she borrowed. Money flowing into the system, coming to us, is part of this Inflow process.

• Ongoing – There is no 100% guaranteed ongoing income, but some things come close. Your salary is one example, where although you might lose it with one job, you can still find other employment, and the income is pretty stable. Other ongoing income can be interest earned on an investment that goes on for years.

• Limited – This could be that bonus that you got at the end of the year or the valuable baseball card you sold on eBay. Anything that happens infrequently and in an unpredictable manner falls into this category.

Money Outflow - Buying coffee, paying rent, having taxes taken out of your paycheck, paying for a parking ticket, investing in a mutual fund or letting a friend borrow some cash are all part of the Outflow process. This process encompasses any money that is going away from you.

• Ongoing – There are certain outflows of money that you can’t stop, including paying taxes, buying groceries, paying your power and gas bills, and so forth.

• Limited – Limited money outflows are expenses that can be stopped. Paying off the car stops the car payment. Other limited outflows include buying a computer or paying off a loan. Another example is lending out some money in p2p loan portfolios on Lending Club or making other types of investments.

Realizing that the flow of money in and out of your life is where you have the most control, it makes sense to break this process down, analyze it and change it if needed. In this way, you can make sure you keep as much money as possible.

Next, we’ll look at assets and liabilities as part of the financial system.