Broker Check

What can you control?

September 12, 2012
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Most clients come to see me because they want to be more financially secure and to make better financial decisions.  After we talk about their goals, we look at their resources for meeting those dreams.  Reviewing annual income is usually fairly straight forward.  To be financially secure, we should aim for spending about 80% of our net income and saving the rest – for emergencies and for long-term goals like college or retirement. 

Living on 80% of what we earn is not easy and one of the most difficult conversations I have with clients is about their spending.  While listing monthly bills such as mortgage or rent, utilities and car payments is fairly easy, many people don’t have any idea what they spend on groceries, eating out, entertainment and other fun things.  But the bigger problem is that many people are afraid to take a good, hard look at where their money goes each month.

How you spend the money you earn is the single most important item in your financial life – the one thing that you have the most control over.  While you can’t control the cost of gas, you control whether you drive an SUV, compact hybrid or ride a bike to work.  It’s your decision.  And each decision you make feeds into your financial well-being.  If you feel that your financial health could use a check-up, take a deep breath and let’s go!

It can be fairly simple to track what you spend.  The most important spending categories to track are those “squishy” categories where it is easy to overspend without noticing:  groceries, household items, personal care, eating out and entertainment.  Begin by tracking your spending in these 5 categories and you may be surprised by how quickly this adds up.

If you are comfortable with online banking, you can quickly set up a profile with a site that will consolidate transactions from all of your accounts – both banks and credit cards.  I have found www.mint.com to be a free and easy way to organize and categorize spending.

If you prefer to spend a little money on software – Quicken, MS Money or IBank are good tools which allow you to download transactions from your different accounts.

Or you can go old school and write down your spending in a small notebook that you carry with you at all times.

Whichever method you use – the goal is to track your spending for 3 months in the five categories described above – groceries, household items, personal care, eating out and entertainment.  If you have additional spending that doesn’t fall into those categories, put it under miscellaneous.

If you tend to use a lot of cash, you’ll need to write down how you spend this or better yet – use only the debit card for now.

Once you have the data from three months of spending, sit down with a cup of coffee or a glass of wine and take a look at where your money goes.  If you are spending more than 80% of your income and you are serious about becoming financially secure, then it is time to make some changes.  Can you shop at a less expensive grocery store?  Can you take lunch to work more often rather than eating out?  Do you really need another pair of boots this winter?

If you can’t cut your spending any further or simply don’t want to change your lifestyle, then the alternative is to boost your income.  Next time we’ll explore ways to do that.

If you would like to review your income, spending and savings goals in person – give me a call.

Now relax and enjoy the rest of summer!