At Collins Financial Group, one of the things we do when creating a financial plan, is work with you and your partner to determine what is reasonable and appropriate for you, in terms of spending.
Many people hate the idea of a budget, and for most people, strict budgets don’t work.
We believe it’s important to find the right balance between spending on things that are important to you, and ensuring there’s enough money being directed to the places that will help you build wealth, and ultimately achieve your goals.
We like to think of it as cash flow management, rather than a budget.
Small amounts of overspending have a big impact
I was recently talking to a couple, Jenny and Steve*, who are in their early 50s. They earn good incomes, but regularly overspend.
They want to retire in 10 years, but they consistently overspend each week. Each time they do, no matter how small, it takes them a little further away from their retirement goal.
We call lifestyle expenditure “discretionary” spending. It’s the spending that includes things like clothes and dining out.
This is where the challenges were happening.
“If they continue to go down the path they are going down, their retirement at 60 isn’t going to happen” – Troy Collins
To get them back on track, I spoke to them about needing to focus on their longer-term goal – retirement.
Were they a little uncomfortable with the conversation to start with? Yes.
But it was worth it to help them refocus their minds and habits, and get them back on track.
Now many people will just tell you to cut back. However we take a different approach.
We look closely at the weekly spending amount allocated, and the amount that is being spent. We also look at it in the context of the whole financial plan.
In Steve and Jenny’s case, we decided that the figure allocated for them was no longer realistic for their current needs. That was why they were overspending.
So rather than continue to deviate from the plan, spend on credit cards and draw from their loan, we increased the spending budget. Yes, increased!
Of course we also ensured that by doing so, Steve and Jenny were still on track to meet their retirement goals.
In this case, it was a pretty simple adjustment. But if the numbers are a little tighter, it can mean that a little more spending now, may push retirement out a few years. Some people are happy to make that compromise.
Others, however, prefer to rein in their spending, because the retirement goal (and getting there as fast as possible) is more important to them.
Different people want different things. What’s important to each person is different, and what his or her goals are, is different. Understanding the implications of the choices we make, is important.
Now your main goal may not be retirement at the moment. But think about how your cash flow management is impacting on reaching your goals.
Maybe it’s time to adjust your plan.
* Names have been changed