Cash Flow Faucets – Your Paycheck – Lessons in Life Management

Believe it Or Not You Have A lot of Financial Options With Your Paycheck

Most people who are a salaried, hourly employees, or business owners look at their paycheck from their salary as a flat amount they receive and rarely make any adjustments; however, I am a strong advocate of managing your “faucet” of a paycheck and aiming for living off your “all faucets OFF income.”  This post will walk through what I mean and how I have used the concept over the years to deal with my different seasons in life.

Concept 1:  You Already Know What you Should be Doing

The first hurdle with this concept is realizing you know what you should be doing with your paycheck:

1. Your 401k, 401g, SEP IRA or other investment vehicle should be maxed out
2. Your HSA should be maxed out if you have one
3. Your allowances in the US tax system should be set to zero – regardless of how many allowances you actually have, and you should be withholding at a single rate if you are married as you are just going to spend that money
4. You should have automatic savings set aside for your rainy day fund
5. A lot of companies/employers provide FSAs for Child or Elder care which should be maxed out if you have the need

Concept 2:  How Many “Faucets” Do You Have Turned On?

So if you know where you want to be, that means for every item you aren’t doing you have that “faucet on” – you have cash flow coming to your monthly paycheck that you shouldn’t (in the long term).   If times get tight with your finances – turn on a faucet!   My wife and I have turned our faucets “on” and “off” multiple times throughout our years as we have had different seasons in life.   What do I mean?

An illustration with dummy math:

1. Paycheck is $5,000 a month
2. 401K at 5% match to get employer match = $250 a month
3. Required Taxes and healthcare = $500 a month
4. Net Paycheck = $4,250 of your “best case scenario cash flow”

Let’s turn OFF some faucets with dummy math:

1. 401K at max out is $1,500 a month (or an additional $1,250 out of the paycheck)
2. HSA maxed out is $500 a month extra out of the paycheck
3. If you put withholding to zero on taxes = $200 a month out of the paycheck
4. Saving $100 a month for “what ifs” out of the paycheck
5. Net paycheck = $2,200 a month with “all faucets off”

You likely get the idea for your personal situation:   There is the “all faucets off” scenario for your paycheck and a “best case scenario cash flow” situation for you.  You likely are always somewhere on that spectrum and don’t have to be at an extreme.

Concept 3:  Realizing You Should Have All Faucets Off

Unless you are really really wealthy -> You need to be living off your “all faucets off” income number.   If you are living off anything other than “all faucets off”, you need to be working towards getting there unless you want to work forever.

Concept 4:  It’ll Take a While

It took our family 8 working years to get to “all faucets off” the first time as DINKS (dual income no kids) and after we realized we were going to have a family and needed to buy a house it took us a total of 14 working years to get to the next “all faucets off” level set.   Our family suffered everything from job losses, to kids, to new house, to student loan, and all the other stereotypical things that get in the way of saving money.   I’ll admit a few promotions due to long hours and work ethic helped which is why I think everyone should have a strategy on their job:  Your Primary Income – What’s Your Strategy?

Concept 5:  How It Helped

As I mentioned above there was a period of time between our DINK period and having a family of four that we had to have faucets “on” otherwise we couldn’t have afforded everything at that present moment…. it was just a reality.   By knowing we needed to get “all faucets off” – my wife and I both knew we needed to buy houses and cars that ultimately helped us get to this steady state.  We both drive cars that are 6+ and 11+ years old and we bought a house that was within our budget.

Concept 6:  Built in Contingency

As you can imagine – once you get to an “all faucets off income” from your paycheck… if something unexpected comes along you not only have your emergency fund available to get through the situation but multiple “faucets” you can turn on to give you near term cash flow.   This can be an extremely comforting mental place to be at.  Need to pay off that new A/C unit you didn’t want to buy?  Turn on a faucet.

In Conclusion

This is a REALLY BIG concept to put in a short blog post and I’ll likely link back to this post many times in the future.   Everyone says “live below your means” which is fine to say but a lot of people can’t translate that into action on approaching their finances.  I hope this post gave you an actionable way to think about at least defining where your finances SHOULD be so that you can think about how to get there.   Everyone needs a benchmark – our family’s is “living off our all faucets OFF income” to put “living below your means” into a number vs. a phrase.