Planning Grid: Understanding Financial Inflows

At Haddam Road Advisors, we emphasize that understanding financial inflows is key to effective financial planning. But what are financial inflows? Simply put, they are the funds that come into your life, and they can be categorized based on two important factors: predictability and durability. These factors help us structure financial plans and adapt to changing life circumstances.

Financial inflows are the foundation of our Planning Grid, a framework we use to simplify complex financial decisions (below). This grid breaks down every financial issue into core components like money coming in, money going out, and how these dynamics affect your overall financial health. If you’re new to the Planning Grid, download our White Paper that outlines over 70 financial planning issues you might encounter.

Types of Financial Inflows

When analyzing inflows, we group them into five broad categories:

1. Active Income: This is income generated from employment or active involvement in a business. If you’re working as an employee or are an owner receiving profits or distributions, you’re generating active income. These types of inflows are typically regular and predictable, but they may vary based on industry and market conditions.
2. Passive Income: If you’re an investor earning returns without active involvement, you’re receiving passive income. This could come in the form of dividends from stocks, distributions from partnerships, or interest from bonds and loans. These inflows may be less frequent but are generally more stable over the long term.
3. Contract Income: This includes structured payments you receive based on agreements, like pensions, Social Security, or insurance settlements. These are predictable inflows that are often less affected by market volatility, making them a reliable source of income in financial planning.
4. Selling Assets: Selling a business, property, or investment generates inflows, but these vary in terms of size and timing. The structure of the sale—whether it’s a lump sum or installment—affects how predictable and durable the income is.
5. Borrowing: Borrowing money is technically an inflow, though it’s accompanied by the obligation to repay. Mortgages, credit cards, or loans for investments fall under this category. While borrowing can provide short-term liquidity, it’s important to consider the long-term cost and impact on your financial health.

Predictability and Durability: The Core Metrics

When assessing financial inflows, predictability and durability are crucial. Predictability refers to how regularly the income is received—whether it’s bi-weekly, monthly, or yearly. Durability is the ability of the inflow to withstand changes in economic conditions. For example, if you’re an employee, how secure is your job if the economy shifts? If you’re an investor, how stable is your investment in the current market?

Real-World Implications

Understanding the predictability and durability of each inflow helps create a more resilient financial plan. If one source of income is less durable, you may want to balance it with more predictable or stable sources. Our Planning Grid provides a detailed look into these aspects, offering clear steps to help you navigate the complexities of financial planning.

What's Next?

This is just the beginning of understanding your financial inflows. Next, we’ll explore financial outflows—essentially how your expenses, such as taxes and lifestyle choices, impact your overall financial health. In the meantime, we encourage you to download the full White Paper, which outlines 70 financial issues you might face and how the Planning Grid can help.