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Writer's pictureTreavor Dodsworth CFP®, CPA, CKA®

5 USES OF MONEY

During the CKA® training, I learned this simple and practical way to think about cash flow. Ron Blue, the presenter, made the case that there are five uses of money:

piggy bank with money coins

  1. Giving

  2. Taxes

  3. Debt

  4. Lifestyle

  5. Savings


Most, if not all, of our money transactions can fit into these five categories. Giving is self-explanatory, as are taxes and debt. Lifestyle is essentially everything you are spending that isn't in one of the other categories. This is all living expenses like groceries, eating out, travel, etc.

 

The case was made that budgets should be constructed in this order. Giving first, taxes next, and so on. If you switch debt and lifestyle, you could get into trouble. For example, you can see how if you set your vacation and eating out budget (lifestyle expenses) before taking into account your mortgage payment that could be problematic.

 

Inevitably if you start with your income and then begin subtracting out these categories, you will end up with either a deficit or an excess at the end. If there is a deficit, you need to walk back through and figure out how to zero it out. Can you increase income in some way? Can you eliminate debt by selling an asset? Can you reduce expenses in some manner?


Tracking expenses can be difficult. Thinking of it in terms of identifying these five variables can bring some simplified order to your cash flow.

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