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.

Financially Get a Jump Start on 2017

office pictures may 2012 002The beginning of a new year is a good time to evaluate your finances and take steps to improve your financial situation.  Start by reviewing your living expenses and comparing them to your income.  Are you living within your means and spending money in areas that are important to you?  Look for opportunities to prioritize your spending where you will get the most benefit and joy.

This is also a good time to calculate your net worth to see if it has increased over the previous year and evaluate progress toward your goals.  To calculate your net worth, add up the value of all of your assets including real estate, bank accounts, vehicles and investment accounts and subtract all outstanding debts including mortgages, credit card balances, car loans and student loans.

With a better understanding of your net worth and cash flow you are ready to set some financial goals.  Start with the low hanging fruit including paying off outstanding credit card balances and establishing an emergency fund.  Maintain an emergency fund equal to at least three months of expenses.   Once your credit cards are paid off you may want to focus on paying off other high interest debt.

After paying off debt and creating an emergency fund, it’s advisable to get in the habit of saving at least 10% of your income.   Saving 20% may be a better goal if you are running behind on saving for retirement.

Take advantage of opportunities to defer taxes by contributing to your company’s 401k.  If you are self- employed create a retirement plan or contribute to an IRA.  Take advantage of any match that your employer may provide for contributing to your retirement plan.  If you are already making retirement contributions, evaluate your ability to increase your contributions.  If you have recently turned 50 you may want to increase your contribution to take advantage catch-up provisions that raise the contribution limits for individuals over 50.

As the new year begins you also may want to evaluate your career situation.  Saving and investing is just part of the equation, your financial security is largely dependent on career choices.  Look for opportunities to enhance your career that may result in a higher salary or improved job satisfaction.  It may be time to ask for a raise or a promotion or to explore opportunities in a new field.  Consider taking some classes to sharpen your skills for your current job or to prepare you for a new more exciting career.

You may have additional goals such as buying a new home, contributing to your children’s college fund, remodeling your house, or taking a big vacation.  Strategically think about your priorities and what will bring you satisfaction.  Start the year with intention, identify some impactful financial goals and create a plan.  Formulate an action plan with specific steps to help you meet your goals.

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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