Key to Financial Success is Understanding and Managing Your Spending

Jane Young, CFP, EA

Jane Young, CFP, EA

Sometimes the simple things can make the biggest impact on our lives.  One of the most important steps toward achieving financial success is to fully understand where you spend money.   Increasing your awareness of how much you have available to spend and where you spend this money helps you become more intentional in your spending.

Studies have found that many of our actions are based on habit rather than conscientious decisions.  This is true with the food we eat, our daily routines and our spending habits.  By tracking your expenses you may discover spending patterns that are preventing you from achieving your financial goals.

This may seem obvious, but if it’s been a while since you took a serious look at your spending habits, it may be time to track and evaluate your spending.  You don’t need an expensive software package, just a pen, paper, and a calculator.  Review your credit card statements and bank statements over the last 6 months and track your monthly expenses.  If you spend a lot with cash you may need to keep a journal, for a month, to monitor where you are spending your cash.  Don’t leave out the quarterly and annual expenses in your review.  Compare your expenses to your net income to determine how much is left at the end of each month.

This exercise should be enlightening and you will probably be surprised at the amount you spend in certain areas.  Think about your financial goals and evaluate how you are actually spending money in the context of your goals.  Are you maintaining an emergency fund and saving money to meet long term goals such as retirement, a new home, a new car or college education for your children?  Create a spending plan that supports your financial goals.

You may find it helpful to systematically set aside or invest money to build an emergency fund, invest for retirement or save for college tuition.  If this money is put aside, it may be easier to become accustomed to living on the remaining funds.

Regardless of your income level, the secret is truly understanding how much you can spend and being intentional about how and why you spend your money.   Budgeting is about setting financial goals and priorities, not keeping you from doing what you love.   If it’s a priority to spend a lot of money on eating out, taking a vacation or buying a new car and it fits within your financial plan, then enjoy yourself.   Alternatively, if you are spending too much in one area consider enjoyable alternatives.   For example, meet friends for happy hour rather than dinner at an expensive restaurant.

Being aware of your spending helps you spend more intentionally and weigh the trade-offs of every purchase.  The simple act of reviewing your past spending habits will make you stop and think before making spending decisions in the future.

Tips from the Wealthy on How to Get Rich

Jane Young, CFP, EA

Jane Young, CFP, EA

You don’t have to be incredibly intelligent and born into the Rockefeller family to attain wealth.   Below are some pointers commonly shared by wealthy people on how to manage your life and your money to reach financial independence.  There is no magic, achieving financial security involves straight forward, common sense actions to gradually build your net worth.

  1. Write Down Your Goals: It’s great to dream about what you want to achieve but to accomplish something you need to put your goals into writing and create an action plan to attain them.
  2. Control Your Expenses: Take the time to understand and manage your expenses and create a budget that supports your goals.   Spend less than you earn and develop good saving habits.  Keep your expenses in check when things are going well and avoid automatically increasing your expenses as your income grows.
  3. Don’t Buy Status: Don’t buy things to look rich or to impress your friends.  Most wealthy people drive older model used vehicles and live in modest homes.  Use your money to save for the future and spend on what really matters.
  4. Educate Yourself: Getting a good education and selecting the right career is a huge factor in attaining wealth.  A good education can result in a more rewarding job in a field you enjoy.  If you enjoy your work you are more likely to excel and earn more money.  If you are in a dead end job or a career you don’t enjoy consider going back to school to transition into a career for which you have more passion.
  5. Be Patient and Maintain a Long Term Perspective – The key to successful investing is having the patience to ride out fluctuations in the market. Resist the temptation to chase returns and time the market.  Invest for the long term and let your portfolio grow over time.  Stay the course and avoid making decisions triggered by emotions.
  6. Manage Risk and Return – Balance your desire for high return with the risk involved. Maintain a diversified portfolio with adequate short term liquidity to get you through rough spots in the market.   Rebalance on an annual basis to keep your portfolio diversified.  Take a disciplined approach to investing and avoid high risk investments that promise a return that may be too good to be true.
  7. Start your own business – According to Forbes nearly all of the people on their list of billionaires made their money through involvement with a business they or their family had started. Owning your own business may seem too risky but it can provide you with an opportunity for higher earnings and greater control over your financial future.
  8. Avoid Complex Investments – Avoid investing in anything that seems overly complicated or that you don’t fully understand. Complex investments often come with  greater risk, a lack of control, limited marketability, limited transparency and hidden fees.

The Secret to Financial Freedom is Living below Your Means

Jane Young, CFP, EA

Jane Young, CFP, EA

Over the years I have observed that a comfortable retirement and financial security can best be achieved with reasonable lifestyle choices.  One of the biggest detriments toward reaching financial independence is spending beyond your means and spending on things you don’t really need.  You don’t necessarily need millions of dollars to retire comfortably but you need to follow a lifestyle that minimizes your living expenses while allowing you to indulge on things or experiences that are really important to you.  Good financial planning requires a balance between current expenses and saving for the future. 

Many Americans have a habit of systematically increasing expenses in lock step with salary increases.  Along with a big raise or promotion comes the inclination to buy a bigger house or a new car.  As we progress through our careers, earning a higher income, we continually take on more financial obligations becoming hand-cuffed to our jobs and our bills.  By increasing your lifestyle every time your income increases you can get caught up on an endless treadmill, trapped with a lot of debt for a house and cars that may be more than you really need.  I’m all for enjoying some of the benefits that come from all your hard work but it’s prudent to spend below your income.   Avoid the temptation to live an extravagant lifestyle and compete with your neighbors, colleagues and friends.  Instead, take pride in following a solid financial plan by saving for the future to achieve greater financial freedom.

As a rule of thumb, save or invest at least 10 – 20% of your income and maintain a buffer of 4 to 6 months of expenses to cover emergencies or a change in your ability to earn a living.  Try to keep your housing expenses below 28% of your gross income; this includes your mortgage payment, insurance and taxes.  Avoid systematically increasing your expenses.  Give yourself some breathing room in case you want or need to make a career change.  Save for the future and keep your options open.  As your income rises automatically put a larger portion into savings and retirement.

To keep expenses under control, examine what is important to you and set some priorities.  You have worked hard and you deserve some of the nice things in life but spend your money on things or experiences that genuinely make you happy.   If you want a really nice house you may decide to spend less on vehicles, vacations and clothing.  If you love taking extravagant vacations consider buying a smaller home and less expensive used vehicles.  Never buy on impulse – always look for ways to save money on the purchase of things you decide are important to you.  

Prioritize your spending to live below your means, save for the future and focus on what truly brings you joy.

Save Money in Retirement

Jane Young, CFP, EA

Jane Young, CFP, EA

There are many ways to stretch your retirement dollars without dramatically impacting your lifestyle.  Start by evaluating what is of great importance to you.  Create a plan that encourages you to spend on things and experiences that are important to you and helps you reduce expenses in low priority areas.

Depending on your priorities, a decrease in housing expenses may provide tremendous cost savings.   If you live in a city with a high cost of living, consider relocating to a lower cost city – ideally one closer to family.  According to Forbes, some of the most affordable cities in 2014 include Knoxville, Birmingham, Tampa, Virginia Beach and Oklahoma City. 

Downsizing is another great way to reduce expenses.  Now that you’re retired, your housing needs have probably changed.  Downsizing can help you reduce expenses on mortgage, insurance, taxes, utilities and maintenance.  In addition to saving money, you may be ready for a different lifestyle, a new floor plan (living on one level) and a new neighborhood that better meets your needs throughout retirement.

In retirement there are opportunities to save on vehicle expenses.  Assuming you are no longer commuting to work every day, you should be able to save on gas and maintenance for your vehicle.   Additionally, many retired couples don’t need two vehicles, selling a second car can save on car payments, insurance, taxes and maintenance. 

Vehicles are a depreciating asset where you can lose thousands of dollars by simply driving a car off the lot. Save money by resisting the temptation to buy a new car.  Internet sites such as Edmunds.com and Kelley Bluebook (kbb.com) make it easy to research prices to negotiate a good deal on a used vehicle.   Additionally, where possible, buy your vehicles with cash and avoid high interest car loans.

In retirement, you have more time to focus on saving money. Use this time to shop and compare, watch for specials and utilize coupons.  Evaluate your home, auto and health insurance and compare prices and features provided by different companies.  Save on cell phones, internet and television by comparing service offerings and negotiating prices.  Consider doing chores around the house that you previously hired someone else to do and cook more to save on eating out.

Having more time can also result in saving on travel expenses.  A more flexible schedule, allows you to avoid peak season and get reduced rates on airfare, lodging and restaurants.  May and September are great months to travel and get some good deals.  You can also save by flying during the week.   Travel sites such as Tripadvisor.com, Cheaptickets.com, RickSteves.com and Vacation Rental by Owner (VRBO.com) can also help maximize your travel dollar.

Finally, avoid the temptation to over spend on children and grandchildren.  You will probably need most of your money to cover retirement spending needs.  Give your family the gift of your love and time rather than your money.

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