Credit cards make spending money easy but without making us think much about how much we are spending. Then the bill comes and our payment is bigger than last month’s. As a CERTIFIED FINANCIAL PLANNER™ professional (CFP®), I often hear “Mr. Brewer, I don’t have any money to invest.” Are there funds that you just don’t know about? Let’s examine what might be going on.
Most salaried people think of their money in terms of the net or spendable income. However, that is not all of the money. A simple way to think of where your money goes can be expressed by the acronym TGISIDS: Tax, Give, Insure, Save, Invest, Debt (as in pay debt), and Spend.
Many people don’t consider what they pay on taxes as spending. The government doesn’t trust most of us to pay our tax bills so they have our employers take it out, on our behalf. We don’t get a chance to think about it, like we do with employee benefits or whether to fund that night out on the town. Some people feel that they have little control over taxes, yet they get a refund. Refunds often get spent as “found money” and are not allocated to advancing long-term financial goals.
Some people automate their giving and savings. They know, as the government does, if it doesn’t land in their checking account, they will treat it as being invisible. Your company may have automatically enrolled you in your employer-sponsored retirement plan knowing that you would likely not miss it. As the money is for your retirement, that is not a bad thing.
If you’re giving is in the form of tithing or writing checks to charities or family members, it becomes visible. The same goes with writing one big check on April 14 for an IRA. Many people find either they don’t have the money or find it a painful check to write for a small tax reduction. Unfortunately, they don’t understand the benefit of tax-deferred growth on what they invest. However, that is a longer-term gain.
Insurance, emergency savings, investing for college, and paying debt, for the most part, make up visible spending. Open enrollment of employee benefits involves visible spending. Some companies allow you to purchase various types of insurance in addition to health. The types of insurance may include disability, life, and long-term care. Many people make the decision not to purchase some insurances based on the fact that it decreases take-home pay.
We can find a number of ways to rationalize not taking these benefits. Often at the center is our desire to maximize our current lifestyle. That can easily leave you vulnerable to a catastrophic risk that could have been hedged with insurance or savings.
How much should you be spending on your goals?
Have you stopped to calculate how much you need to save at what rate of return you need to achieve the fund your retirement lifestyle? What about the college fund you need for a child or grandchild? You may try to delay your own retirement but it is difficult to tell an 18-year-old to hold off going to college for a few years.
Let’s examine retirement research from Employee Benefit Research Institute by Jack VanDerhei, Ph. D1. He shows that men and women have different spending needs. For a 25-year-old man earning as much as $65,000, an 8.2 percent savings rate increases the probability of success to 90 percent.
The blessing for the expectation of a longer life means the need for more savings. For a 25-year-old female earning as much as $65,000 a 9 percent savings rate increases the probability of success to 90 percent. If that same woman earning $65,000 waits to age 55 she would have to save 18.5 percent and would see the success probability drop to 50 percent.2
Redirecting your spending and finding a spending coach
If you’re like many people you don’t have a budget that completely outlines your discretionary spending. You might see your credit card bill as simply a credit card bill but not know if the bill was driven by spending for gas, alcohol, lattes entertainment, etc.
If you do not pay your credit card balance at the end of the month those discretionary activities end up being costlier than what you thought when you decided to buy. These activities can quickly leave little or no room for spending on your financial goals.
Do you have a spending plan that includes your goals and the other elements of the invisible and visible places that our money can go? If not you may need to develop one in order to reallocate monies that may be going to lattes, purses, golf rounds, and other elements. Is your cost of credit also holding you back?
While you may know what to do, do you need an accountability coach? If you can’t do the complex goal calculations, it’s important that you get someone who has the professional qualifications to do so. I believe in CFP® professional and Chartered Retirement Planning Counselors. These professionals can help you to create a financial plan and goal milestones that will help to create incentives for yourself in order to stay with your plan.
Ready to assess where you are? The Envision Wealth Structural Assessment, part of the Envisioneering™ Financial Planning Process™, will help you assess where you are today. Whether you decide to work with us or work with another firm please download it today to get your spending on track.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
1 How Much Needs to be Saved for Retirement After Factoring in Post-Retirement Risks: Evidence from the EBRI Retirement Security Projection Model, ® by Jack VanDerhei, Ph.D., Employee Benefit Research Institute.