Hi my name is Brian Kearns with Haddam Road Advisors. Welcome to a financial plan in 10 minutes. In this short time, I'd like to show you a basic framework that lies at the heart of every plan and it's my hope that this will help you to make better financial decisions for the rest of your life. So let's get to work.
Okay, so let's start at the beginning with a dollar. What are your thoughts when you see this? Personally, I think it's not a lot of money, but it's something I see every day and I use every day to live my life. It is ubiquitous. It is everywhere. So what if you received a thousand dollar windfall, what would you do with it? Would you spend it? Would you save it? How would you want to allocate it? It's a decent sum, but it's not life changing. So let's make it interesting.
What would you do with a hundred thousand dollar windfall? How would you want to allocate it? Would you want to spend it? Would you want to save it? How would your partner want to allocate it? Would they want to spend it or save it? Could you agree on how to allocate it? In hindsight, if you had received this 10 years ago, what do you think would have been the best way to allocate it, taking into account your future needs, your family's future needs?
Your values, your family's values, your community's values. What if it was 10 times the size? What if it was a million dollar windfall? Does that change your thoughts? What if it was part of a family trust? How would you want to see it allocated? Now, whether you have 10, 000 or 10 million, all these questions can be effectively analyzed in the following framework, and I call it the planning grid.
Now the planning grid something I set up every time I talk to a client or perspective client. It helps me understand their situation and I hope it helps them understand their situation. Now this grid has four measures and two metrics that sit at the heart of every plan and we'll go through them quick.
Top left. MCI, money coming in. It's basically your income. MGO, money going out. These are the expenses that you, uh, you, that you've used to live your life. Now, uh, this creates a net cash flow and, and money flows in this direction. Now this is basically your checkbook, uh, with a few tweaks in it. If this is a positive number, positive net cash flow, great.
It becomes something that you own. It becomes your savings. Now this particular quadrant, uh, it's broader than just dollars. I look at, uh, the own side is for people to think of in terms of something that you value, that you possess, that you value, or that can create value for you. Something that can generate income for you, uh, something that can generate income for future generations, be it, uh, for your, for your family through legacy planning, or for, uh, your community through charitable, um, planning, uh, personally, in this quadrant, the thing these days I value most is time.
Next. The old O column. This is these are your future obligations. Now these are obligations against future income debt is an obligation against future income and there's good debt and there's bad debt and we'll talk about that that in the future. It's at some point in the future. These two fluctuating value over time and create something called your net worth.
Now here's a secret. If you had if you have A positive net cash flow something to think about here great. It's something you own But if you have a negative cash flow, the only way that you can cover that is by selling something you own Or borrowing money something to think about next different types of income.
Okay, we're going to take a minute here and go through the basic different types of income. There's other things involved that if you want to get more, but we only have 10 minutes. So, generally speaking, the most common forms of income are a W2 income. That means you are an employee of a firm. You receive a salary.
The firm withholds taxes from that salary and then you are paid a net of that number. Good thing is it makes your cash flow planning a lot easier than if you are a 1099 recipient. 1099 non-employee compensation. This means one, a company pays you for doing work for them. They don't withhold taxes.
Likewise, if you are a partner in a firm, If you're a beneficiary of a trust, you'll receive what they call K1 income. And there's a whole lot of moving parts in a, in a K1, in a, in a partner or a trust return. But, it's similar as the 1099, in that your income is not necessarily completely predictable.
You have to pay quarterly taxes and you have to understand your net cash flows regarding that. Next up we're gonna take a look at the 1040. Everybody uses it.
This form should be familiar. It's form 1040. Everybody files it every year with the IRS. What I'd like you to do is, if you have a quick second, grab your last 1040. Go to line 15. This is your taxable income. Write that down. Make a note of it. Go to line 24. That's your total tax. Take line 24. Divide it by line 15.
That's your effective tax rate for that particular year. Say if you earned $100,000 and you paid $20,000, your total taxable income was $100,000 and you paid $20,000 in tax, your effective tax rate was 20%, you keep 80%. Remember that for later. It's an invaluable number to know when you're working on planning issues.
Next up, the five things you can do with income. There's only five things.
So we went through the different types of income you, you might encounter in your life in the money coming in. Next, there are five things you can do with this. What are the five things? We'll go through them right now. There's only five things. One, pay taxes, life's greatest expense. The key to understanding this is when, how, and why, understanding your income flows and planning for optimal tax deductions and a good tax planner is worth the wait and after tax goal.
It's a CPA, joke. I couldn't help myself, so we'll just move on. Number two, living your life. Spending money on food, clothing, and shelter, and everything else you do to fund your lifestyle. This is after tax money. Remember, we talked about your effective tax rate. This is what goes in, in planning your net cash flows.
It all fits together on the top part of the grid in terms of money flows. Three, saving and investing. The best way to look at this is, this is your future lifestyle. What do I mean? This will generate income for you in retirement. You will receive 1090, call it 1099 income, 1099 interest, dividends, capital gains.
And if you're in partnerships, you receive investment partnership K1s. The key to this is compounding of investment returns. Compound interest was described by Einstein as man's greatest invention. Money grows over time. The key to growing your money is understanding risk. When I talk to clients I've looked at risk for my entire career.
I talk to clients and I say to them, it's a combination of danger and opportunity. What opportunities, what danger are we willing to undertake to take advantage of certain opportunities in the market? Not all opportunities carry the same amount of danger. A good investment advisor knows the difference and can communicate that to his clients.
Number four, deferring income. Don't pay tax on it yet, but at some point. You will owe taxes on this deferred income when, how, and why it will become part of your net cash flow and planning for that in the future is another part of the whole plan or the part of the grid. You might have personal deferrals in the terms in terms of an IRA, 401k, a pension, you might have an annuity.
Health savings account. Those might be those will be in your name. You might have something set up for generational planning. The current wealth tax is 50%. If your state is over 12 million for an individual and 24 million for a couple, you will have State tax planning issues. There are different things to examine there in terms of irrevocable trusts and grantor retained annuity trusts.
A lot of rules there that are actually changing as we speak, and in 2026, The amounts that I just described there will go down to half. So, this is something that a lot of people will need to pay a lot of attention to very soon. Also, if you are involved in your community and you want to give to your community, you can get involved in charitable planning.
You can set up a charitable trust. You can set up a donor advised fund. These are different ways of giving back. And they all, uh, they all can defer income or taxes on income for you. The fifth way you can, um, allocate income is to pay down debt. This is the other way to increase your net worth. It also will, ease up net cash flows.
It's another thing to, to think about when you're planning. Now, the last thing I want to go through, uh, is, is really a really quick example of what I look at as good debt and bad debt.
Okay, really quick example here. Debt is an obligation against future income. What do I mean by that? Good debt versus not good debt. So say your tax rate is 20 percent and you put $2,000 on a credit card with a 20 percent rate, 20 percent rate. It's unbelievable. They're out there right now. If you, if you hold this balance for a year and pay it off in a year, you will effectively have to earn $3,000.
Pre tax, remember you only keep 80%, but pre tax, you'd have to earn $3,000 to pay off this balance. So, what if you took this money and put it towards a course that develops your technical skills and you get a $5,000 raise? That's a win. You've taken debt, you've paid it off. You're because you have greater cash flows, you're earning more income.
What if you took that $2,000 on a credit card and bought the platinum pass to Lollapalooza? Now you'd have a heck of a weekend, no question, but is it really a win? You're going to have to earn $3,000 over the next year to, to pay off that $2,000 debt. So. Is it a win? So, there's good debt and there's bad debt.
There's productive debt and there's not productive debt. So, next, what's it all about?
So what's it all about? There's an art and a science to financial planning, and this is part of the art part. This is Maslow's hierarchy of needs. You've probably seen it before. And, and I like to use this when I talk about a lifestyle leading to meaning you start off at the beginning with the basics, food, clothing, shelter, we talked about that in terms of lifestyle planning, but it grows.
If you, you develop relationships, you become part of a community, you build a family, you have a lot of friends and you climb your way. I like to say you climb your way up to the purple part where you look back and you say, Oh, that's what it's all about. You it's, it's a level of self fulfillment. It's, what they call self actualization, which is kind of a very interesting term.
That means something different to everyone. That's the art part of financial planning. How do we help you finance your way, the pyramid to the purple part. Next standards of care.
My first home was in Hadham, Connecticut, above a nursing home that my parents owned. My mom was a geriatrics nurse, and within a nursing practice, they utilize what they term, standards of care. I try to do the same, and this is what I use when talking with clients. To give them ideas of things that we want might want to focus on.
It's not a comprehensive list, but I like to show it, uh, to help identify issues that they might want to address as they climb Maslow's pure pyramid to the purple part. And you'll see some things here that every issue here works on the planning grid. You could see that the cash flows. Expenses, lifestyle, investments, portfolios, retirement income, all these different, charitable, legacy planning, charitable planning, all these different issues can be described through the planning grid as you work your way up to the purple part of Maslow's pyramid.
So I hope you got something out of the last 10 minutes, maybe a minute or two more than the last 10 minutes. There's a whole lot there. I plan to do a whole series of videos to expand on the concepts that we talked about here. I hope you got something out of it. My name is Brian Kearns, Haddam Road Advisors.
Hope this helps as you make your next financial decision. And I'd love to hear your thoughts and suggestions. Thank you for your patience and thank you for watching. Cheers.
