How to Allocate Your Cash Flow – Save, Spend, Invest, or Pay Down Debt, Episode #7

A common question we hear from physicians is what to do with their cash flow? For younger physicians, it’s such a unique situation, since few other professions have this big of a jump in income from one year to the next as you finish training and become an attending. The question often surfaces later in your career as well, when financial responsibilities for children (such as college) have passed. In either case, you can suddenly find yourself with extra money and unsure of exactly what to do with it, or how to best allocate it among your various options.

Outline of this episode

Paralysis by analysis [1:10]
The definition of cash flow [2:55]
Allocating cash flow across different uses [4:25]
What’s the best return on your cash flow? [5:18]
The emotional side of the coin [6:29]
What’s really important [8:42]
Which goal first and why [10:01]
Changes in prioritization and importance [12:31]
The key points [14:50]

The water pitcher analogy

When thinking about cash flow, we think of it as a pitcher of water. We all have a certain amount of water in our pitcher. Then we think about the various uses, or goals, for your cash flow as cups. These cups can be things like saving for retirement, college education, or a down payment on a home.

Now, if you had enough cash flow, or water, in your pitcher to fully fund all of those various goals, or cups, then you’d be all set and planning would be easier. However, if you’re like most people, you aren’t able to fill all of your cups in any given year, and this is where you have to understand trade-offs and prioritize how you use that water pitcher to fill the cups that matter most.

A better question to ask…

Looking purely at the financial side of the equation, the math is fairly simple, and people often start by asking the wrong question first, which can over-complicate things. Instead of asking whether you should pay down debt or invest the additional cash flow, we think a better question is what will give you the best return on that cash flow. Do you have a mortgage or student loans at 3-4% and $100k sitting in a bank account earning next to nothing? Paying down the debt at least saves you 3-4%. On the other hand, investing that $100k over time gives you the potential to earn an even higher return, which can be a better alternative than paying down the debt more aggressively. There are many other factors to consider and we cover them in more detail in the episode.

Striking the right balance of saving for tomorrow while enjoying things today

Figuring out your saving targets first and making sure you’re on track there can allow you the liberty to spend the excess. After you know you’ve hit those targeted savings, you won’t have to worry that you need to save more— or wonder if you’re overspending— and can enjoy guilt-free spending. This is a reverse budget approach since we know that not everyone cares to go through a detailed monthly budget. This is why money and money decisions don’t have a one size fits all answer. It’s important to recognize that even when you do come up with your ideal cashflow allocation today, that doesn’t mean it’s set in stone. Things can and will change over time, and that’s perfectly fine.

Resources & People Mentioned

Blog post on how to allocate your cash flow

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