If you’re like me, one of your favorite activities at the start of a new year is reviewing how you or your family spent every dollar in the previous year.
Okay, so you’re probably not like me. In fact, what I just described may sound like a terrible nightmare to you.
That’s fine. But I’d like to make the case that being just a little more like me could have a profound impact on your financial future.
In 2016 my family spent $49,441, not including income taxes, charitable giving or significant home projects. Of this amount, 31% went to the house payment; 18% was spent in grocery stores; 12% was health expenses, most of which was the cost to have a baby, net of HSA reimbursement; utilities and shopping both took 8% (shopping is mostly Amazon); and home maintenance costs were 7%. Every other category composed 5% or less of our spending.
I don’t consider any of these numbers noteworthy, in and of themselves. The grocery number is quite a bit higher than previous years, but more kids--and diapers--will do that. Having babies is expensive. The home maintenance number is in line with what should be budgeted annually (2% of house value), though it could be less if I did fewer projects (the chicken coop needed a major face-lift) and my wife bought fewer annuals. What may be most alarming is that the total expenditure represents more than 800 transactions, many of which are automatic payments.
You might notice some categories that aren’t listed, such as restaurants, travel, and entertainment. For many people, these categories easily exceed 5% of spending. Restaurants and entertainment have never been a high number for us. Travel used to make the list, but that is one area that having kids leads to lower spending. We currently have no desire to fly anywhere with our girls (ages 1 and 3). Routine and consistent naps are too valuable.
My purpose in sharing this actually has nothing to do with how my family spends money though. The impactful aspect is what can be achieved when you have this sort of data.
Most people I advise do not track and review their spending. Consequently, their spending frequently does not align with their goals or priorities, but they don’t have a process in place to even realize it. Many times I have heard people express frustration that they earn good money, but don’t know where it all goes, and there is not enough for ________ (retirement savings, travel, paying down debt, giving, a bigger house, college savings, etc.).
No one has bemoaned to me not having enough for shopping because they are putting too much in their 401(k) or giving so generously to their favorite charity. Though it may be the case that they have less discretionary income, it is an intentional decision based on a heartfelt priority. We rarely miss the money we give away or save; only the money we waste.
When someone does begin to track and review spending for the first time, the results are nearly always transformative. The simple realization of how much money is wasted on insignificant expenses--rather than personally meaningful goals and priorities--will likely immediately begin to impact behavior. It also creates accountability and transparency between spouses who might have differing financial personalities (i.e. spender vs. saver).
"Many times I have heard people express frustration that they earn good money, but don’t know where it all goes, and there is not enough for ________"
Personally, I have been tracking our spending long enough (10+ years) that the behaviour-changing revelations are now few and far between. The greatest value I receive from the process is the ability to look forward and prepare for the future.
For example, based on our spending in 2016, I have a very good sense for how much we will spend in 2017 (no babies expected this year). Comparing this to expected income, I evaluate how much we will be able to give away and save/invest for our longer-term goals, such as retirement, new vehicles, etc. If I’m unsatisfied with the amounts available, I can make changes at the beginning of the year to how we spend, rather than being disappointed at the end of the year that we fell short of our giving and saving targets.
Additionally, I’ve used this information to project retirement goals and scenarios, evaluate life insurance needs, determine the best place to allocate extra funds, and manage income tax liability.
These days, tracking spending is extremely easy and quick due to the many aggregation services that will automatically link with and download transactions from bank accounts, credit cards, etc.
For me, these things are fun. That’s why I’m a financial planner. But even if you don’t enjoy the process, hopefully you see the value in tracking and reviewing your cash flow. If you start now, most programs will pull in transactions from the last 3-6 months, so when 2018 rolls around, you’ll be able to look back and see exactly how you spent ______ in 2017.
For advice on aligning your spending with your goals--or a recommendation on how to start tracking your spending--contact me at firstname.lastname@example.org.
• This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. 1323DJP