When the markets fall, it can be intimidating for everyone — including your financial planner. As an individual, watching your account balances fall is stressful and, as a financial planner, we watch that happen to each of our clients. It’s hard to see our clients struggle.
Money and relationships can seem at odds sometimes. Especially when partners have different approaches and attachments to money, everyday discussions can become heated and difficult. If you’ve got some “money troubles” with your partner, know that you’re not alone.
Ready to reach your financial goals in 2019 and set yourself up long-term financial success? It doesn’t require an elaborate budget or downsizing in the majority of cases. In fact, it can be pretty simple: Review the big picture
I recently visited a fifth grade classroom for a personal financial lesson. The ideas we talked about were simple, but the concepts hold true whether you are a grade school student or well into adult life.
Clients describe the meeting as shocking, even while admitting that they knew it was coming. It’s the financial planning meeting in which we look at their retirement projections to see if they are on track to meet their financial goals.
Some couples have figured it out. They know what they can spend; they live on a budget and have saved enough to be comfortable the rest of their lives. But for other couples, the meeting highlights adjustments they knew they needed to make.
And by adjustments, that can mean dramatic changes in their current lifestyle.
What to do when your lifestyle needs to change?
Get concrete numbers
When you come to terms with the fact that your lifestyle has to change, get concrete numbers. Talking in the abstract about needing to “cut back” is a lot different than knowing exactly how much money you need to be saving every year and what your ending budget number needs to be.
There are important numbers to consider when looking at spending cuts versus retirement dates or goals. If you were to work an extra year or five years, how does that change your financial picture? Often, those changes can have a dramatic effect on what you need to cut back.
Work with a financial planner
There are resources online, but I encourage you to find a financial planner you feel comfortable with and work with them through this process. Besides developing a relationship that aids financial recommendations, they can give you insights based on similar people’s experiences that they’ve worked with. A good financial planner will get to know you personally and offer advice tailored for you and your situation.
A knowledgeable financial planner will also help you identify the other areas in your finances to be aware of, expert advice that will help you should something unexpected happen. One gap in your insurance and an unfortunate incident can destroy your financial plan and everything you are working towards. Obviously, I’m biased, but I truly believe that the investment is worth it.
Identify your values
Knowing your values makes financial decisions so much simpler. It becomes easy to lose sight of what is really important to us, much of which doesn’t require a lot of money, and focus on the extras of life. Living life within your values creates the framework by which you begin to make intentional decisions.
In his New York Times column, David Brooks says it well: “Early in life you choose your identity by getting things. But later in an affluent life you discover or update your identity by throwing away what is no longer useful, true and beautiful.”
Consider Cutting Back Big
Big lifestyle changes are hard. Much of the popular advice you hear these days advocates cutting back on purchases like your everyday latte at Starbucks. While it’s true that small changes can make a difference, those results will be more subtle and long-term.
When you are faced with a lifestyle change, you must put all the options on the table. Some may be painful: downsizing your house, trading in your leased car, looking for another job, moving for a promotion, cutting your annual vacation. However, it’s necessary to consider every way in which you can make a significant change.
Begin Evaluating Every Option
Look at a list of all of your expenses and evaluate every line item. Begin by asking “why”. After evaluating what you money is being spent on specifically, ask why you are choosing to spend money on the items that you are. What are the alternatives? Even when alternative options seem far outside the realm of possibility, still include them. The purpose of this step is not to solve the problem, but to brainstorm every possible solution. Considering options that seem far from what you are willing to do (like trading your car for public transportation), give perspective and bring attention to the luxuries that you have in life.
Below are some examples of line item evaluations:
Car Payment: $650/month
Why am I spending money on this? Because I need transportation!
Why am I choosing my current option? Two cars are more convenient for our family and I’ve always wanted a BMW.
What are the alternatives? Sell it and have one car in the family, sell and buy a nicer car, sell and buy a less expensive car, sell and buy a used car, take public transportation.
How open am I to changing this (or do a scale of 1-10 on how important this is)?
If you were to change, what would be the monthly/yearly cost difference?
Eating Out: $400/month
Why am I spending money on this? Because we need to eat.
Why am I choosing my current option? We enjoy eating at restaurants and it’s convenient.
What are the alternatives? Eating out less, purchasing ready-made meals, personal chef, cooking all meals at home.
How open am I to changing this (or scale of 1-10)?
If I did make a change, what would be the monthly/yearly cost difference?
Begin to make decisions
After you have worked through your line item evaluations and identified what’s important to you, start making decisions.
As with so much in life, these decisions are not easy or clear cut. Every decision is a trade-off. What is right for one family is not going to be right for the next.
Remember to reflect back on why you are making these changes. It takes courage to make big decisions when your lifestyle has to change, but knowing why you are changing can make all the difference in the world.
If you find yourself unsure of your future and aren’t even sure if you need to cut back, I encourage you to consult with a financial advisor and begin the journey to achieving your financial goals.
“I have no idea how we did it back then,” a client couple commented on a copy of their budget from fifteen years prior. They laughed as they remembered their early struggles. They knew that their life had altered over the years, but hadn’t realized how much it had transformed financially.
The changes that take place over many years can be hard to identify as you go through daily life, but looking back over time, the changes can be shocking.
Most people see their incomes rise over the course of their working years, and as it does, that extra money is added to what they spend. With more money to spend, lifestyle spending creeps up.
Lifestyle creep happens over years. When you were younger, you might not have imagined eating fine dining on a regular basis, or having the ability to shop at Whole Foods or to take vacations. Your own children have grown accustomed to having the gifts and luxuries you never had growing up.
We don’t notice the innocuous changes and grow comfortable with the gradual adjustments. Because it’s not a sudden change, we don’t make conscious decisions about spending. It just happens.
Lifestyle creep is normal and expected in life, but looking at it from a financial perspective, there can be negative consequences if you don’t plan well for it.
How Lifestyle Creep Effects Your Financial Plan
You become inured to spending money
The danger here is that you may not even realize it. An increase in income means an increase in spending. What use to be unimaginable, becomes the norm.
Your perception of money changes
Spending $20 outside your budget may once have thrown your finances for a loop. Now, you don’t even blink at $20 spent here and there, and may spend even more than that without a second thought.
Your lifestyle changes
While you were once able to live comfortably on a certain amount, several years later, that amount has increased. You value the experiences and luxuries of the life you enjoy now. You didn’t know what you were missing before!
Not only has your lifestyle changed, your friends and social circles have changed. Social expectations may include dining at restaurants that would have never fit your budget before. You may feel (consciously or unconsciously) that in order to maintain those relationships, you have to maintain the spending.
Your retirement numbers change
This is the most important way that lifestyle creep affects people. For most, the goal of retirement is to maintain how you are currently living your life, or even increase the amount you live on; meaning that your income level will stay the same or higher.
As your lifestyle spending slowly rises, the amount you need in retirement will also rise. A small lifestyle change now has a dramatic effect on how much you’ll need in the future. As a basic example, for every $1,000 increase in your yearly spending, or $83 per month, you will need to have an additional $25,000 saved for your retirement years to sustain that lifestyle.
People feel compelled to save more money as they near retirement. Saving money is very important, but the biggest impact a couple can make on their retirement is to decrease their expenses.
Proactively Planning for Lifestyle Creep
Track spending and income
If you had a financial plan done in the past, be aware that your income and expenses are likely to have changed over the years. To keep current with the amount you need to be saving, track spending and income and revisit that financial plan often.
The most important element of a financial plan is the dollar amount that goes out every month. When that number changes, it is critical to let your financial planner know. Together you can determine an appropriate savings plan.
Many people intend to save their raises or bonuses. They plan on increasing their 401(k) contributions or putting extra money away for the children’s college fund or another financial goal. However, it’s far too easy to have good intentions and still miss implementing them.
Your expenses will always rise to your income unless you have a plan in place. A plan requires intentionality, energy and time. Frequently it’s on the to-do list, but can feel so enormous that it never gets done. Don’t let this happen!
Your first step is to realize how important this task is. These simple decisions to save or invest windfalls can be the defining point in your financial plan's success. Next, make the commitment to plan and take the time to put systems in place to make it easier to allocate that money. Set up an automatic investing plan or arrange to make extra payments on debt. Check into budgeting apps that help you save without thinking about it. Implementing these seemingly small steps throughout your life will yield big results.
Don’t let lifestyle creep wreck your retirement goals. Being conscious of your spending and having a plan in place will not only pay off financially, it will bring peace of mind as well.
I once heard Michael Port, a successful author and speaker, talk about goals. He wrote Book Yourself Solid, which was released in 2006 and held the number 2 spot on the Amazon best seller list for three days. That would have qualified as a wild success for most, but instead of being pleased with this accomplishment, Michael was disappointed that he didn’t make it to number one.
Michael said that if he would have set a specific goal of making the top 10 on the Amazon bestsellers list, he would have been thrilled with his success. But he hadn’t set a definite goal – he had just thought that, based on his current success, he would see his book reach number one. Rather than experience the joy of success, he felt the defeat of failure.
How often does this happen in our personal lives? If values and goals are not defined, we may miss those successes simply because we weren’t looking for them. Missing success happens far too often.
Why We Miss Success:
Not setting clear goals
All too often, we go about life without intentionally thinking where we are headed. Or if we do think about where we are headed, we think of a general direction rather than clear goals. “Setting goals gives you long-term vision and short-term motivation” says an article on MindTools.com about personal goal setting. Having clearly articulated goals allow us to see progress and know when we should be celebrating success rather than letting these moments of victory go by unnoticed.
Comparison to others
Many times we set out to achieve a goal and reach it, only to find out that the person next door beat us to that same goal or exceeded where we wanted to be. Our successes seem to diminish in light of someone else’s success.
One of my favorite quotes is “comparison is the thief of joy” and it couldn’t be truer here. We lose sight of our own story and journey and instead focus on other people's when we constantly compare ourselves. And many times we don’t even know their full story or where they started from or how they got to where they are.
There is always more
Regardless of how great your success is, there is always more. There is always more money, more prestige or a more enjoyable opportunity. And the more we achieve or move along our journey, the more opportunities we are presented. Our expectations shift and suddenly our focus is on the next achievement or desirable outcome, forgetting what we originally set out to do.
In an article in Psychology Today, Jay Dixit states “one of life's sharpest paradoxes is that your brightest future hinges on your ability to pay attention to the present.” If we don’t mindfully appreciate what we have accomplished, we do ourselves a disservice.
Why are goals important?
Never being satisfied
Because there is always more, it becomes far too easy to stop being satisfied with what we have and strive for what we could have. We look forward to what could, or what we think should happen and forget to look to the present and appreciating what we do have.
This creates an endless cycle of dissatisfaction. We believe that happiness will be waiting upon achieving the next milestone, yet when we finally get there, happiness can only be found hiding behind the next achievement. It's easy to forget that happiness is the journey, not an elusive destination.
Avoid lifestyle creep
As a financial planner, I would be remiss if I didn’t mention the financial implication of continually striving for more without giving heed to why.
As incomes rise, spending naturally rises as well. Lifestyle creep is innocuous: you get a raise and you treat yourself. Soon, you are treating and upgrading and splurging regularly; and before long, spending more becomes de rigueur. It’s a subtle shift in expectations. We become used to what were once far off luxuries, and now can’t imagine life without them.
Many times, I’ll hear clients comment on how differently they live their lives now than they did before. Sometimes it’s intentional, other times they look at their financial path and wonder how they got to the lifestyle they are at.
Improving your lifestyle isn’t necessarily a bad result of success, what’s important is whether or not your goals are intentional. Have you made a conscious decision how to spend any raises or windfalls, or are you floating down the lazy river of mindless spending?
Anchor your life
Making conscious financial goals anchors your life to your central values. It gives meaning to accomplishments and progress. It gives you the opportunity to make sure that the important things in your life stay important. It allows you to move forward with success without losing sight of where you want to be.
Set goals, recognize when they are achieved, and allow the sweet taste of success to fill your daily life.
Acting as your own boss and calling the shots while translating original and unique ideas into an income is the epitome of making a living for many people. A friend of mine, thinking her dream was to be an entrepreneur, convinced herself it was the route she should take. One day, I gave her the values exercise I use with my clients. Over the next several weeks, she continued to think about her values and what they meant for her life. She was surprised to realize that her values weren’t dependent on living an entrepreneur’s life. No longer constrained by a standard she felt compelled to achieve, she became open to looking for full time work. While she continues to be self-employed, her happiness is no longer based on the ideal of entrepreneurship, but rather on the principles of her internal values.
All too often, we’re told what our values should be. It can happen as subtly as observing our friends’ lives and desiring what they have, to the blatant advertising we are bombarded with every day in the media. Do we stop to ask if the messages we’re receiving are things we truly want in or lives? Are we chasing what others want for their life instead of examining and focusing on what is most important to ourselves?
I know a woman who found herself envious of an old school mate who frequently posted pictures of her large group of friends and all the activities they did together on Facebook. She thought she was missing out by not having a similar busy social life for herself. Finally she thought to ask herself, “is that really what I want?” She realized how much she prized her time with her immediate family, the deeper relationships she enjoyed with a few close friends, and her alone time that brought her time to reflect. Once she realized what was truly important to her, she could admire her friend’s social life, but as appealing as it looked, recognized it wasn’t for her. She was thankful for the quieter, nourishing one she already had that met her own needs.
It can be an ah-ha moment when you step back and determine what’s most important to you and realize it’s not the same as what the world has been saying you should value.
Living life within your values becomes the framework by which you begin to make intentional decisions. Instead of having financial decisions thrust upon you, you are able to take each decision and view it through the lens of your values.
Does the new promotion encourage time with my family?
Would moving to a new city enhance our sense of adventure or is it an escape?
Would this new volunteer commitment add joy to my life or is another obligation?
Does this school promote the education we desire for our children or is it the easy solution?
Am I buying things because I need or want them?
When values are not prioritized it can lead to a fractured life. People often spend money on a bigger house or a nicer car without putting thought into why these purchases are important to them. Just because it’s a good thing, doesn’t mean it’s the right thing.
When you don’t make the effort to weigh decisions based on your values, you can feel swept away by life, as though you have lost the ability to choose.
Living your life based on your values is not easy. By its very nature, values are different for different people. Being married means two people have to find a common ground for their personal values. Naturally, we want to look to others for guidance, someone who has lived a life we want to live, so we can then walk in their footsteps. We want a template. We want the certainty that living our life by our values will be successful. And many times, that’s simply not possible. Charting your own course and making difficult decisions takes courage.
What does a values-driven life have to do with a personal finance blog?
When I work with clients, there is inevitably a point where I am asked “Will we be able to do XYZ?” In fact, many times that’s the very reason why clients come to me. They want to know what options their finances allow them.
The answer is rarely as simple as a yes or no. This is where values come into play and I have to ask them:
Are they willing to work longer or step into a higher-paying role?
Are they willing to save more and cut the amount they are spending now?
Are they willing to leave less money to their children and grandchildren?
Are they willing to not travel around the world?
Are they willing to live on a tight budget?
These are all value decisions, and conflicting values decisions at that. The reality is that for every financial decision that is made, values are being defined.
The “American Dream” is a prescribed set of values, it isn’t necessarily everyone’s dream. If you strive for someone else’s dream, it stands to reason that you’ll never find your bliss. It’s crucial to identify your personal values and reexamine them frequently. Ask yourself if the life you are living is in harmony or at odds with those values. Making intentional decisions based on what’s most important to you can be liberating and will allow you to have the one thing we can agree that we all want: a happy and fulfilling life.
You'd much more likely be found perusing books on thirteenth century Scandinavian religious poets than caught even walking near the personal finance section in the bookstore. You break out into hives when you pick up a book on money management. You can hardly bear to open, much less review your bank statement. Does this sound like you? Perhaps money is a regular source of stress in your marriage. Or you just avoid talking about money at all costs, yet have a nagging feeling that you should know more than you do. Then there are all the numbers and jargon and fine print.
I admit it. Personal finance is overwhelming.
Everywhere you turn, from friends and news articles to talk shows and internet chatter, there’s differing advice on what you should do. Pay off your mortgage, don’t pay off your mortgage. Invest in this, don’t invest in that. The advice seems to be always changing. Never mind that your life is always changing!
Not only are money matters frequently overwhelming, they’re often filled with “should haves.” I should have known better. I should have known that taking out that credit card was a bad idea. I should have known what to do with my 401k. I should know what a 401k is!
If you feel like a dinghy swirling in a money maelstrom with the winds and tides constantly changing and worrisome misgivings circling like sharks, don’t fret. Calmer waters can be found!
Let’s set some ground rules to go forward.
1. No “should haves.”
Shaming yourself into action just doesn’t work, so don’t do it. The mistakes you made in the past are over and done, it’s time to move forward. Unless you are willing to forgive and be kind to yourself as you move forward, your progress will be limited.
2. Choose to look forward.
Even though I’m a financial planner, I still struggle when I hear the word “budget.” I automatically associate it with chastising myself for spending more than I planned on, for letting my husband down by not following our spending plan.
However, just because that’s where my mind goes, it doesn’t mean my mind stays there. When we discuss budgeting as a couple, I decide that I'm going to look forward instead of worrying about what's done and dusted. You can decided that as well. The past is simply your guidepost. Budgets can give you a perspective on the how you spent, but their true purpose is to look toward the future.
3. Cut yourself some slack.
No matter how organized a person is when they come into my office, it takes everyone time before their money matters are straightened out. The worst thing a person can do is expect to sit down and have their entire financial situation figured out in one hour.
Financial goals take time, much like working out and eating right. The motivation is there at the beginning, but it can slowly fade as time goes by. Accept that you’re going to make missteps and fumble along the way. It’s what you do to get back on track that determines your success. And remember, even just having the desire to understand your finances is a brave first step.
4. Give yourself credit.
Think back in your life. What are you most proud of? What is the greatest challenge you have overcome? Have you pulled yourself together after losing a job and moved forward?
Enduring the death of a loved one, caring for someone who is ill, surviving countless sleepless nights with a newborn baby or making it through a child’s rebellious teenage years are all life experiences that people go through that are far harder than getting your finances in order – I promise you.
You’re still reading. That tells me that you have what it takes to move forward with your finances. It takes courage, but I know you can do it. (Feeling like you lack that courage? Reread Ground Rule #3.)
Now that we have the ground rules in place, let’s talk about some practical steps you can take today.
Pick a (free) online budgeting tool
There are a lot of great sites out there that are free as well as user friendly. Two of my favorite tools are mint and the budgeting tool that comes with our bank (USAA). Personal Capital is another free product ranked as a top financial tool. The goal is to get all of your information in one place, allowing you to easily get an overall picture of your finances.
Worried about having all your financial info in one place? Read this article about the security of online personal finance software.
Set a timer
Decide on a time limit. It could be 15 to 30 minutes. Start with something simple, like linking your online banking to a personal finance tool or simply seeing how the program gives you reports. As you get familiar with the software you'll feel more comfortable using it.
Specify a specific date and time
Schedule a time for next week when you will spend 15 minutes looking at your finances. Nothing more. We’re focusing on baby steps. Make it a goal to sit down with your finances four times in the next month.
Involve your spouse
Talking about money with your spouse can be unpleasant and sometimes even contentious. Once you have one month of expenses listed, bring your spouse into the picture. Have a conversation with them about your spending and discuss if it’s aligned with what’s important to both of you. Be aware that talking with your spouse about money can be difficult (read more about that here and here). Bonus points if your spouse enjoys budgets and will do the first steps for you!
It’s easy to lose track of financial goals. Make them a priority. Put a note in your wallet by the credit card you use most often or stick a picture of that vacation spot you want to travel to on your mirror. The idea is to remind yourself daily to spend money wisely. It’s far too easy to fritter away money in small amounts here and there (that eventually add up to large sums) when you don’t have a financial goal in mind.
You don’t have to manage your finances alone. Find a financial planner to help you work through your financial situation. When you meet with a professional, make sure that you find one that makes you feel comfortable and is willing to work through your situation at your pace (read about how to choose a financial planner here).
Having a plan in place can make you feel like the king of the seas. So relax, personal money management is not as hard as you think. Follow these steps to help you grab that rudder and before you know it you'll be charting a course to financial confidence.
You want a financial advisor you can trust, and not knowing the fees you're being charged makes it difficult to build that trust.