We get calls (periodically) from clients who suffer from cash flow interruption. And while the occasional emergency happens to all of us, these cash flow interruption events happen to some folks often — in fact, almost by design. Or, they happen by “management design.” Let me explain:
In my final year of studies at CW Post (over thirty years ago), I took a top-level course in Business Management. We spent the entire semester breaking down Peter Drucker’s book, “The Practice of Management” written in 1954. When I took the course (in 1983), I thought the book was ancient! Most of the concepts seemed so brain-dead simple I thought “this has no practical use in the fast-paced 1980’s!”
I was very wrong.
In his book (and ultimately our course) Drucker discussed “Management by Objectives.” My professor at Post (an excellent instructor, Dr. George Frey), shared an opposing view, “Management By Crisis.” Management by Objectives (MBO), in the business sense, was all about goal-setting and having different members of the management team work together; collaborating to achieve intermediate and longer-term goals.
Once team goals are set, supervisors can meet with their own teams and set individual goals, as well as short-term goals for the team. All goals (short, intermediate and longer term goals) are then matched against resources needed. Then, organized implementation begins and ultimately review and appraisals are set.
Here’s a very small business example of Management by Objectives:
To replace our computers, printers and other hardware in the office every three years costs an estimated $10,000. It’s a drag coughing up $10,000 all at once just to purchase machines. Instead, we set aside $285 in our business budget every single month. After 35 months, we have nearly $10,000 to pay for new hardware in the office. We stay on top of our technology and there is no all-at-once, $10,000 “cash flow interruption.”
Now, what makes this concept truly work is what happens in month 36: we continue to sock away the same amount. In three more years, we will be able to do the very same thing, again with no “cash flow interruption.”
Let take Management by Objectives to a personal approach:
Long-term objective: lose twenty pounds in six months. If (for example) you are reading this near the middle of June, look ahead on your calendar. Six months from now will be the holidays. That is your long-term objective.
Putting Management team in place: You would (hopefully) share this weight-loss goal with your significant other, or share with friends, to gain their support (which you may need in the coming months to stick with it).
Design and execute your plan: You would (hopefully) set a plan to work out four, five or six days per week.
Resource Management? You could join a gym or make sure you have everything needed to exercise at home. Daily, set our your clothes and set an alarm clock.
Review and Appraisal: You would measure your performance periodically on the scale (review) and if needed, change your workouts (appraisal).
Here’s another one (and one we hear a lot): buying a car.
Under Management by Objectives:
Long-term objective: buy a car to replace the current car in three years.
Putting team in place: tell your significant other, your friends, your advisor you will need to replace the current wheels in about three years.
Design and execute your plan: save $400 each month. After thirty-six months, you’ve socked away $14,400. In four years, it could be $19,000.
Resources: you’ll need to be sure you can save $400/month, starting now. What changes will you make?
Review and Appraisal: each month/quarter — review your statements. Are you on track? Can you save more?
When the time comes to replace that car, you’ll have a car to trade-in, plus over $14,000 or more.
“Management by Crisis” would work this way: Save nothing for the future. And three years from today, the car breaks down and it’s time for a new car.
Running with MBC (Management by Crisis) means withdrawing from your IRA (or 401k at work) and plunking it down on a new car. Not only does a new car depreciate in value very quickly, you’ve set off a tax time-bomb for next year by (likely) taking from your IRA, involving ordinary income taxes and a penalty for premature withdrawal. And if you took a 401k loan, now you have to pay it all back.
Suppose, instead, you opt to lease the new car for $400 per month. Thirty-six lease payments could wind up costing $14,400. And the car has to be turned in at the end of the lease, with no residual value to you. Instead, start making those payments now… to yourself (to your bank account).
The Future You Hates You
Financially, we’ve run into many people who have a “money style” of “Management by Crisis” or MBC.
And we have a message for those who subscribe to MBC: the future you hates you. Because of these cash flow interruption events. Because you are living beyond your means. Or because have yet to appreciate the power behind saying the word: No.
You are robbing cash flow from the future (your future) to live in the present.
A 2015 report from the National Bureau of Economic Research (NBER) showed at any point in time, 21% of active 401k participants have an outstanding loan. And at any point in time in the previous five years, thirty-seven percent of participants had an outstanding 401k loan.
As mentioned earlier, emergencies arise. And it’s great we can tap into some funds through a plan at work for such emergencies. But thirty-seven percent of participants needed loans? There are far too many people living their (financial lives) as “Management by Crisis” and having one cash flow interruption after another. Or never received the proper education to set up a “safety-net” first before doing ANY kind of investing. Including investing for retirement.
As a spectator, watching folks drain their IRA’s and thus igniting all kinds of tax-bombs in the future is a painful sight. You are wrecking your future with bad decisions made on impulse. With a little bit of planning, much of these episodes can be avoided.
Due to cash flow interruption, the retired you will resent the current you.
And your kids may also resent you as well: you’ll need to work longer, so you won’t be around to babysit their kids (your grandkids) and you’re keeping the next generation from working. And you’ll be grumpy (grumpier?), because you are still working!
Changing behaviors is a VERY hard thing to do alone (or even with help).
And shifting from MBC (Crisis) to MBO (Objectives) can be slow and equally painful.
How could someone begin to shift from MBC (Crisis) to MBO (Objectives) when it comes to managing finances? Examine your spending habits. And how do you do that? Start with your credit card and bank statements.
Sidebar: Recently, at a local store here in Monmouth County, I was stunned when, after spending $26 on several items, the cashier asked if I wanted a receipt. Banks and financial companies are conditioning us to no longer get receipts, or (instead) have receipts emailed. Will they be read?
The discount broker we use at Mullooly Asset Management offers a very low rate on commissions if our clients opt to receive electronic statements and trade confirmations. And the transactions are not emailed — you get a notification, a reminder, to log in (with a password) to review trade slips and statements. Do you actually do this? It’s often pushed off “until later.”
Living your life by crisis and going from one cash flow interruption to another seems to be the new “American Way.” Unfortunately, many won’t realize what financial harm they will be harvesting in the future if they do not shift to “Management by Objectives” soon. The future you will thank you.
And so will your advisor.