March 2019 –
Spring is a great time to reflect on how your spending looks for the first few months of the year.
Spending & Budgeting
If you prepared a budget in January, you now have a full three months of actual spending to compare to your budget projections. High net worth individuals and families can benefit from a good budget review as much as an individual who is just beginning down the path of their financial future. While those with significant financial means typically have more latitude in their budget, it’s still important to make sure that your spending is in line with your expectations.
Your Spending Should Reflect Your Values
Your spending reflects who you are and what you value. The best way to ensure your spending is in line with your personal goals and values is to review where your money is going on a regular basis. Budgeting is also a great way to keep ‘expense creep’ from eroding your income growth. Anyone who has been fortunate enough to experience growth in their personal income knows it’s all too easy to also see expenses increase with a more expensive lifestyle. This is not to say that you should not enjoy your higher income levels, but it’s important to make sure that an increase in expenses is spending that is in line with your goals and values.
The Foundation of Your Financial Planning Goals
Bigelow employs a goals-based approach to the financial planning process. Common spending goal categories include basic lifestyle necessities, health care, travel plans, vehicle purchases, planned giving, and other specific expenditures. These goals are at the center of the planning recommendations our clients receive when discussing their financial plans. A change in your spending goals could result in a change in your overall planning strategy. For individuals still in the accumulation phase, understanding your future spending plans is also the precursor to understanding how much you should currently be saving today.
Accuracy is Important
Most individuals have a general idea of what their current spending looks like but increasing accuracy can lead to better outcomes. Let’s use a quick example to illustrate this. Assume that we have a 45-year-old individual who thinks, using a reasonable estimate, that she spends $70,000 on her basic living expenses. At a 2.25% assumed inflation rate, that $70,000 will look more like $109,235 twenty years from now. But what if her actual current expenses are $85,000? The future spending will be closer to $132,643 – a difference of over $23,000 at the beginning of her planned retirement date. This miscalculation could continue to compound throughout her retirement, potentially affecting overall spending goal by hundreds of thousands of dollars over her lifetime.
Looking for Surprises
Unless you already adhere to a budget and review your spending against your estimates, you may find that your spending patterns aren’t exactly what you thought they were. Sure, many items are predictable: utilities, property taxes, and other fixed payments generally don’t fluctuate much. On the other hand, discretionary spending, travel, dining out, and hobby expenses may fluctuate dramatically. Your budget review should provide some insight into whether you are sticking to your budgeting plans, allowing you to get back on track if there are any significant deviations. Also, unexpected mid-year events may cause you to reevaluate your spending plans and make some adjustments to your spending goals for the remainder of the year.
Technology Can Do the Hard Work
There are a variety of technology tools that are available to help you with the spending and budgeting process. Some personal finance tools, such as Mint and YNAB (You Need A Budget), allow users to receive regular feedback on their spending habits. The advantage of using good budgeting technology, rather than simply looking at how your bank or credit card providers report your spending, lies in the ability to create customized spending categories. A typical credit card provider may provide a spending analysis that includes a dozen or so general spending categories. This may not be nearly specific enough for you to carefully consider your individual spending habits, given that so many different expenditures will ultimately be lumped into a small number of categories. Taking a more surgical approach to your spending categories will allow for a customized spending review. For example, a credit card provider may use the ‘Entertainment’ category to include all your spending on items such as gym memberships, health spa visits, movie tickets, or trips to an amusement park. While this may be good enough for some individuals, others may want to carve out a special category for the health-related spending that they place a higher personal value on, as opposed to a trip to the movies. Additionally, maybe the trip to the amusement park would be better suited to a ‘Kids/Grandkids Entertainment’ category. Once you have created your specific categories with most technology services, they will remember which expenditures belong in which categories so that you don’t need to repeat the process. This allows you to quickly understand if your spending matches your goals and values.
Budgeting Makes You More Frugal
Those who have spent time considering their budgeting and spending goals have a vested interest in where each dollar is going. They know what their goals are, what they value, and where they do and do not want their money going. This creates a more frugal state of mind and will help reduce spending on unimportant items and impulse purchases. Additionally, you can feel confident when your spending follows a budget that reflects your values, which is ultimately what the budgeting process is all about.