The Financial Funnel

By Michael J. Searcy

Yes, you have seen some variation of this image before. Yes, some long time clients tease us about drawing it too often. And yes, it is pretty simplistic. However, it gets the point across, is easy to understand, and it impacts everybody, including those with substantial six-figure incomes.

If you have heard the saying, “Don’t let your outgo exceed your income or it will be the beginning of your downfall,” that is what this funnel is all about. Let’s take it apart…


Mikes Funnel

The Funnel

At the top, we start with sources of income. For those in the work force, you would find your salary here and retirees could include pension and Social Security. In most cases it also includes income from dividends and interest or investment activities. Therefore, to simplify we include four arrows representing (1) salary, (2) pension income, (3) social security income and (4) investment income. Our assumption is that everything flows into the funnel at the top.

Once in the funnel, there are certain spigots where your income can flow out. This can include taxes, fixed living expenses that are essential, and may include debt elimination. In addition, you probably have a pre-determined savings amount to achieve your intended objectives (retirement, college or weddings for children). You may also have variable expenses like food, clothing and entertainment, which you may feel are fixed living expenses but, indeed, they are items for which you do have some options and some control over.

If there is anything left that has not flowed out of one of the spigots while traveling through the funnel, it winds up pouring out from the bottom. We will call this “discretionary income”. Discretionary income can be used for whatever you deem most important, which may include lifestyle spending, accelerated debt reduction, savings for retirement, or another worthwhile objective.

Gushing Spigots

Many individuals let their normal and variable living expenses and tax spigots gush, leaving inadequate excess income for debt reduction and savings for their long term security and desires. Have you or someone you know experienced this? Perhaps somebody had to borrow money to pay more taxes than they had planned for. Maybe somebody pays their credit cards off in payments rather than in full, thereby compounding larger and larger balances. Maybe somebody had to take out a home loan to help a child with college or pay for a wedding. When you let the top spigots gush, you may come up short for the bottom two spigots and may never see available discretionary income.

As you can imagine, all of these frustrations and activities could be avoided, or rectified if you’re already having issues, with some simple planning. We use worksheets to help people identify where they stand today financially. They show a picture of ones assets and liabilities and they account for total income and expenses. If you would like a copy of these worksheets, reach out to Cali at [email protected] and we will send you a PDF of the forms at no charge and with no obligation.

You need to have an accurate picture of where you stand, including:

  • Requirements to accomplish your objectives (college, weddings, retirement, insurance, debt reduction, etc.)
  • Amount you should save to cover these objectives
  • Amount needed for taxes
  • Amount needed for normal living expenses (fixed and variable)

Only after a careful examination of these required expenditures will you know what you have toward all the “extra” lifestyle spending freedom you desire or to accelerate the accomplishment of your other intended objectives.

Some people can do this all themselves but many appreciate having some help from someone they trust. It’s the old adage: You can ask someone to help you out of a hole you have fallen into OR you can hire a guide to help you avoid the holes. If you would like some guidance, please reach out to me or any of our team at 913-814-3800. We have more than 75 years of combined experience helping our clients get their financial affairs in order and would be happy to do the same for you.

Please remember that different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this content, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for you or your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from Searcy Financial Services, Inc.

The content of this letter does not constitute a tax or legal opinion. Always consult with a competent professional service provider for advice on tax or legal matters specific to your situation. To the extent that a reader has any questions regarding the applicability of any specific issue discussed in this content, he/she is encouraged to consult with the professional advisor of his/her choosing.  

Published for the blog on July 1, 2015 by Searcy Financial Services, your Overland Park, Kansas Fee-Only Financial Planner and Investment Manager.