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Why Financial Planning Requires a Level of Sacrifice

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Dan Loose, MBA, CFP®

Disclosure: I love farming. I have always wanted to be the one who could live off what one could grow.  In fact, I have been known to threaten my wife that I want to move to rural Idaho and learn to farm. This, despite the fact that I can barely grow Kentucky bluegrass and my tomatoes ripen just as the first frost arrives. Perhaps it would be better put to say, I love the “idea” of being a farmer because it is said that farmers raise great kids; the crops are merely a byproduct. Anyway, I recently learned another positive trait that farmers have. Farmers understand the concept of savings better than just about anyone else.  That’s because farmers traditionally had to set aside a portion of their harvested crop to be used for the next year’s planting. That’s a foreign concept lost on most today.

A national survey which was conducted online by Harris Poll on behalf of CareerBuilder from May 24 to June 16, 2017, revealed that 78% of Americans live paycheck to paycheck.[1] Despite the fact that women earn approximately 20% less than men on average, 81% of women reported living paycheck to paycheck versus 75% of men. Granted, when one is only earning minimum wage, it is indeed extremely difficult to survive any other way than by living paycheck to paycheck. However, the study revealed that over 9% of those earning greater than $100,000 per year, were also living paycheck to paycheck. And those earning between $50,000 and $100,000, 28% live paycheck to paycheck and 70% characterized themselves as being in debt.[2] Another study as reported by Forbes highlighted the fact that most Americans cannot sustain even a $500 unexpected expense.[3]

When probed more deeply, it becomes clear that Americans are also not very concerned about their financial picture. Only 32% of those workers interviewed had a budget; 18% had reduced their retirement plan contributions within the last year, and 38% do not contribute anything to a retirement plans (401k, IRAs, or the like). “Still, despite financial woes, there are certain things employees aren't willing to give up. When asked what they'd absolutely NOT [emphasis mine] give up, regardless of financial concerns, employees cited:

  • Internet connection: 54 percent
  • Mobile device (smart phone, tablet, etc.): 53 percent
  • Driving: 48 percent
  • Pets: 37 percent
  • Cable: 21 percent
  • Going out to eat: 19 percent
  • Traveling: 17 percent
  • Education: 13 percent
  • Buying gifts for people: 13 percent
  • Alcohol: 11 percent”[4]

Therefore, it is likely that there is a large percentage of the population will simply live the way that they want to live regardless of the reported stress levels because other things are more of a priority to them. These people will continue to live in denial and with the dissonance around what they think brings them happiness and what truly brings contentment.

The sad fact of the matter, you simply cannot acquire APPRECIATING assets, including those assets that will provide an income stream for you when you are no longer able or willing to work, unless you spend less than you earn.  Henry David Thoreau is quoted as saying, “Almost any man knows how to earn money, but not one in a million knows how to spend it.”

How do you acquire real wealth, not just stuff?  You need to follow the example of those with real wealth. You need to save 12% to 20% of your income (As a planner, I hate to quote percentages because every person’s situation is unique. Nevertheless, the percentages help give some a reference point). How do you do that you might ask? The best way to do that is by determining what you should reduce or cut out. You can obviously decide that you no longer need the hobby or the toy or the late model car or the “n” (fill in the blank). But what if you are really at a loss as to what to cut? In that case, you can begin by tracking your income and spending so that you can determine exactly what you are earning and what you are spending those hard-earned dollars on. Then you compare your spending (as a percentage of your income) with those who are living on a budget and saving for the future—retirement, education of the children, or some other expense, say, the place on the lake or the trip of a lifetime.

The source of dollars is generally the easy part in this equation; the spending, not so much. Take your after-tax income and hold on to that (this will become the denominator for your percentage calculations). Then begin tracking your spending in an app or by collecting receipts and building a spreadsheet, or simply get an old fashioned checkbook register and write down every time you spend money. Once you have done that for a month (these figures will become more concise over time but 30 days is a good starting point), you set up categories and place each of those entries into the corresponding category. Once you total up the amounts in each of the categories, you can easily determine the percentage being spent in each of the categories. When compared to the averages of others who are actually living on a budget, you can determine where you are doing well and where you have areas of improvement. In those areas needing improvement, you have to make the tough decision to throttle back your consumption—so that you have seed for next year’s crop. You can do that by going back through your expenses line by line and determine which of your expenses were absolutely necessary, which could have been completely avoided, and which of those expenses could have been somewhat reduced.

Below are the Suggested Spending Percentages (these are not written in stone on Mt. Sinai but they provide an excellent reference point):

Savings: 12% to 20%

Charity: 10% to 15%

Housing: 20% to 35%

Insurance: 10% to 25%

Utilities: 5% to 10%

Food: 10% to 15%

Transportation: 10% to 15%

Clothing: 2% to 7%

Health/Medical: 5% to 10%

Personal: 3% to 10%

Recreation: 3% to 10%

Debt Repayment: 5% to 10% (Until all debt is retired)

Keep in mind, freeing up your cash flow so that you can begin to save for the future, often requires the elimination of debt and a radically altered lifestyle from the 78% of Americans who don’t have an idea of how they will ever retire.

As financial planners, we are well aware of the common pitfalls and can be an unbiased source of information on how to make your budget work, should you need additional assistance. We are always happy to help put you on a customized course towards reaching your goals. Call us if you would like us to look at your numbers and offer some suggestions specific to your situation.

[1] http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey

[2] Ibid.

[3] https://www.forbes.com/sites/maggiemcgrath/2016/01/06/63-of-americans-dont-have-enough-savings-to-cover-a-500-emergency/#48adccb74e0d

[4] http://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey