As Americans, we hate to budget.
Spending money is so much more fun, but imprudent spending can put us in all kinds of trouble.
I am always a proponent of using a pay yourself first strategy. Setting aside a specified percentage of your income to savings before you spend can save a lot of headache on the budgeting side of things. Of course, life is not always this simple.
In many cases we meet with clients who are in their 40s and 50s and accustomed to a certain standard of living. In some of those same cases, they have earned a high income for the majority of their career and have been able to save and invest while also enjoying a comfortable lifestyle. But there comes a point where you have to examine whether that standard of living is sustainable in to your golden years when your steady income declines or stops coming in altogether.
When Surprise Happens
In the toughest cases this can be sprung on you in the form of company downsizing, a forced early retirement, or changes in health. This is where the hard work begins. If you find you need to reduce your standard of living to meet your long term goals or even to make ends meet, take a close look at where your money is going. This will help you identify places you can cut.
The first step is to start tracking your expenses if you are not already. There are many tools available to do this today that take the manual labor off your shoulders. Once you have an itemized list of your expenses we recommend using broad categories to see where your money goes:
- Debt Payments (Car Loans, Student Loans, Credit Cards, etc.)
- Extraordinary (Car Purchases, Major Home Improvements, Special Trips, College tuition, etc.)
- Child Care (Nanny, Day Care, etc.)
- Lifestyle Expenses
Tactical Process of Cutting Expenses
Lifestyle expenses is what we want to focus on first. These are your regular consumption expenses: food, utilities, clothing, entertainment, regular home maintenance and transportation costs to name a few. All of these lifestyle expenses comprise your standard of living. This is the area you have the most control over, so the easiest area to start making changes. If your overall spending is only slightly above your long term goals I recommend getting started by looking for low hanging fruit in your lifestyle expenses:
- Eating out
- Mid-morning or afternoon coffees
- Utilities-renegotiate your cable bill or cut the cord
- Impulse purchases at Target or Amazon (sound familiar?)
- Expensive jewelry, clothing, or beauty products
- Institute the 72-hour rule
If small changes to your regular routines are not going to make enough of an impact, then you may need to consider bigger adjustments:
- Driving a less expensive car or buying new cars less frequently
- Personal services (massage, nail salon, etc.)
- Household services (cleaning service, yard maintenance)
- Scaling back on fancy vacations
- Reconsider sending your kids to private school or paying 100% of college or wedding costs
- Sell the boat, jet ski, or motorcycle that is used infrequently, but expensive to purchase and maintain
- Reduce spending on gifts to family members or children/grandchildren
In some cases, an even more drastic approach may be necessary:
- Downsize the family home
- Relocate: staying in an area with a high cost of living may no longer be feasible
Making these decisions is extremely difficult, especially when you are used to spending freely on all of the above items. If expenses don’t hold all the answers, then you may have to take another look at the income side of the equation. How much more would you have to make to avoid spending cuts? Or how many more years are you willing to work to sustain your current standard of living? Part time work in retirement may also allow you to continue spending on things you enjoy. There are always trade-offs, so knowing just what those are helps you make an informed decision about how you choose to spend now and in the future.
So, what do you think? Is your current lifestyle sustainable into your next phase of life and beyond? If you are ready to take a look at what tradeoffs you might need to make, please contact us to get started on a financial plan.
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