Creating and sticking to a household budget and savings goal strikes most people as about as much fun as going to the DMV. And yet, when people start and commit to the process they often experience a newfound sense of empowerment and control, and liberation from the vague anxiety and uncertainty they had before. The fear of not really knowing where your money is being spent, coupled with the nagging suspicion that you are not saving enough for future goals can often lead to even more undisciplined, stress-relieving spending, exacerbating the problem.
This reminded me of a conversation I had with a friend a few years ago in which he confided that, despite being in his mid-40s, he hadn’t had a physical in over a decade. What had started as fairly excusable complacency in his early 30s had, over time, morphed to a point where increasing levels of anxiety and uncertainty about his health kept him, paradoxically, from going to the doctor. As a husband and father, I didn’t need to tell him how irresponsible this was, and I could tell how the regret about his behavior was affecting him. I realized he needed a friend who would both empathize with him, but also firmly hold him accountable to take action. I insisted he call and make an appointment with my doctor right then in front of me, and made sure he later went to the appointment. I can still remember the sound in his voice when he called me on the drive home from his appointment. Thankfully, his health was fine. But what struck me was the palpable sense of relief in his voice. Furthermore, since taking that initial action, my friend has turned a negative cycle into a positive one, eating better, working out, and never missing a yearly physical. He now says that he only realized how much subconscious anxiety he carried around with him all those years when it was gone.
Budgeting and saving is similar. As the saying goes: “by not making a choice, you are making a choice.” Apathy and fear are the biggest barriers to change. If you don’t have a concrete budget/savings goal plan, you are running on autopilot with the typical outcome being unfocused overspending and material undersaving. An advisor who properly helps a client construct a budget is not telling him what he can and can’t spend money on. Rather, he illuminates what current baseline spending patterns are, helps define how that spending and saving differs from a client’s unique values and financial aspirations, and then works to better align behavior with those core traits and goals. The benefit comes from proactively defining what you want from your money, and then coming up with a structure that compels you to behave in line with those principles.
Once a client articulates what he hopes to achieve with his money, the next is to drill down on what his short, medium and long-term financial goals are. Next we take a look at their spending patterns over the prior 12 months, and see where they are in relation to client goals. Most find that their current spending behavior leaves their medium and long-term goals woefully underfunded. Taking action in the face of these unpleasant and sometimes demoralizing facts is crucial, but it is important to understand that observable progress can be achieved in as little as a year, with large benefits accruing over longer periods. After defining goals and understanding where the client currently stands, the next component is rationalizing fixed spending such as debt service costs (mortgage, student loans, car loans, etc), insurance rates and coverages, and taxes.
Next we move to discretionary spending. When clients realize how much they spend on eating out, or travel, or just daily discretionary purchases, they are often dismayed. Again, the goal is not to become an ascetic monk, but to make sure this spending is adding true value to your life, and worth the hit to goal planning. Typically, just the simple realization of how much is being spent in these areas, coupled with a modest reduction in the budget is enough to gain momentum, which can be built on over time. An example would be the client who admitted his family had a far better time, and made better memories, on a road trip vacation through the pacific northwest than on an earlier vacation to Hawaii, despite costing a quarter of the amount. Is your spending aligning with what truly adds value to your life?
Often attacking discretionary spending can be done through simple tactics, such as making increased saving automatic by making automatic deposits every pay period into savings account. If you never see it, you generally will not miss it. In a similar vein, it can be constructive to make more of your bill paying manual. Turning off auto bill pays (cell phone plans, utilities, cable/internet, country club memberships, etc), and paying bills manually increases cost consciousness and a closer scrutiny of expenses.
Like my friend who took action, and now takes far better care of his health, clients who take the initial step of creating a budget tend to feel they are spending better with more value to their lives, while also having the peace of mind that they are making real progress toward their financial future and goals. Defining your goals, crafting a dynamic budget, targeting a healthy savings rate, and having an advisor who regularly holds you accountable can result in profound changes. Don’t let fear and apathy prevent you from taking action. As the title of a book by Navy Seal Jocko Willink says: “discipline equals freedom.”