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.
“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.
They could have been contestants on The Newlywed Game, their answers revealing how little they were in agreement on matters of married life. She wanted to travel to Europe and experience the finer things in life. He wanted to know how they were going to pay for their retirement and day to day expenses. She was missing out on life and she blamed him. Their financial lives were unstable and he blamed her. You could feel the tension in the room. The meeting could have used the experienced refereeing of a game show host. These conversations are all too common in my work.
Finding consensus with your spouse is one of the most important aspects of your financial life. Financial harmony within a marriage is critical to financial success.
Why is this so hard? It really shouldn’t be, but as many couples know, it is.
Talking about money is threatening
Regardless of financial situation, something about money strikes at the core of who we are. It defines our status in the world, what we can and cannot have. Money is integrated into every area of our lives, whether we like it or not. Even the most basic choices in life, like the shirt you are wearing or what you do for dinner tonight, is the result of a money decision.
There are conflicting values within each of us when it comes to money. For example, will it really matter if you eat out for lunch today? Surely it won’t affect your college savings. Setting aside money is great, but what about spending a little on that trip you’ve always wanted to take? Add another person into the equation and you have all the makings of an uncomfortable, but entertaining game show: the conflicts are endless.
When it comes down to it, we’re not talking just about money, we’re talking about values.
Ok, so these conversations are threatening, but they need to take place. So what do you do about it?
Make the conversation safe
The fastest way to make a conversation not feel “safe” is to start accusing your spouse. Remember, this is a values conversation, not just a money conversation. Neither of you want what is important to you to be minimized or insulted.
The goal of each conversation is to understand your spouse and for your spouse to understand you. Granted, sometimes you may never understand why your spouse has to spend money on that, but realizing it’s important to your spouse allows you to respect their decision.
Practical steps to making the conversation safe:
- Find a time that works for both of you. Trying to have a financial conversation when you are multitasking or concerned about everything else in life will only lead to frustration.
- Know each other’s strengths. If one of you hates math, budgeting can be more difficult. Forcing a spouse who hates math to balance the budget to the closest penny may be the equivalent to torture. Find a middle ground.
- Remember the person you fell in love with. Conversations can be tense, but remember what drew you to your spouse in the first place. If this is your focus, the edge will come off your voice and your spouse will feel the difference.
Establish ground rules
Which topics are off limits or which topics need to wait until the end?
What happens when you or your spouse gets overwhelmed in the details? Does the meeting stop? Do you take a fifteen minute break? Know what your triggers are and plan for them before you walk into the discussion.
Other ground rules may be to limit the amount of time you spend on the conversation. One person may not be able to focus longer than 30 minutes, making anything over that time fruitless.
Some people may want the numbers ahead of time. They may need time to process and think through their feelings before the discussion, allowing them to not feel blindsided in the conversation.
Go beyond the numbers
As you work through your budget, commit to talking about what’s below the surface. Instead of becoming defensive over numbers, share what they represent and why their important. For example,
“This line is important to be because .....”
Being aware and identifying why you are spending, saving or investing your money is incredibly important for yourself and your spouse. You have to lead the conversation to find the underlying issues.
Lower your expectations
You may walk into a financial conversation with your spouse and expect to come to a conclusion by the end of it. Anything short of this may be a failure in your mind. Lower your expectations. Financial conversations are never a one and done type of deal. The first conversation may simply be to identify a problem. Turn your expectations into goals and realize that it may take time before you end up where you want to be.
There’s nothing to lose and everything to gain when you take the necessary steps to open the lines of financial communication with your spouse. While it may be difficult to return to the rosy glow of honeymooners, thoughtful, deliberate conversations about money in marriage can bring you one step closer to wedded bliss.
The last week and a half has been rough for investors. Everywhere you look there is dire market news. Like Chicken Little, it's easy to feel like the sky is falling. Here are my five tips on what to do when the market is taking a downturn:
Turn off the news
I have stopped watching market news, I read it instead. Reading the news takes out the emotion and drama that fills newscasts and sells programming. I've found I am better able to assess what is actually happening in the market and give better advice to my clients when I’m not channeling the fears of talking heads.
Several years ago I happened to be working from home and had the news on in the background throughout the day. Later that evening the idea occurred to me to consider gold as an investment. As the thought passed, I was shocked. That kind of thinking went against all of my education and background. I then realized that every commercial break throughout the day had ran an ad for a company urgently advising investors to buy gold (specifically from their company). It was at that moment that I really started to understand the power that media, even in the form of commercials, has on people.
Work on something you can control
There is absolutely nothing you and I can do to change China’s economy or the interest rates or what the market is going to do today.
I get it; when there’s so much bad news, you have to do something. So try working on other areas of your financials, things that are not investment related. Finish your estate plan that you’ve been meaning to do for years. Revisit your budget and look at how you’ve been spending money. Are your finances lining up with what’s important in your life? Spend your energy being productive by working on what you can control, instead of fretting about things that are out of your hands.
Identify what's important to you
Another popular way of saying this is “know your why”. Why are you invested in the stock market? What are your goals for that money? Many common objectives include ensuring you and your spouse are taken care of in retirement or helping children or grandchildren get through college. Know why you are investing and then focus on that.
Financial contentions are one of the leading causes of divorce in the United States. When the market goes south, it increases the stress in our lives, and many times this stress spills over into marriage and family relationships. Focus on these relationships during market downturns. Don’t become a statistic.
Keep a cool head
Don’t panic. A market downturn may be more serious than an acorn hitting you on the head, but it doesn't help anything to get your feathers ruffled like a certain frantic fowl. Of course, it’s easier said than done. If you’ve had a plan in place, your plan should be working even in a downturn. This is the time to assess if your plan is doing what it should when the market takes a dip.
Remember, there are seasons to everything and the season of this market downturn will pass like all the others. One of my favorite analogies of the stock market is pruning a fruit tree. In order for a fruit tree to grow and produce healthy fruit, it has to be cut back every year. It cannot grown untended and expect to be a healthy, mature tree for years to come. The same is true with Wall Street. Corrections and downturns are healthy for the stock market. They cause investors to reassess companies and filter out bad investments. Pruning is a painful process, but it is necessary.
Buy, buy, buy
Market downturns are the perfect opportunity to invest. The stock market is essentially on sale at times like these. Of course we don’t know where the market will go tomorrow, but when the markets return, whether that be in one day, one month or five years, you will have benefitted from taking advantage of the reduced prices.
Wealth is made by decisions made when the market is down. The investors who stay in the stock market and continue to invest, even when the news is bad, are the ones that will find the most success and end up wealthy.
If you haven’t followed these guidelines in the past, or even during the current market correction, I have specific advice for you. Think about what you would want to do differently next time. What will you wish you had known? Why was pulling out of the market a bad idea? What would have happened if you would have stuck it out?
Write a letter or note to yourself about what you wish you would have done in the past. Date it and keep it. Read it again when the market goes down to remind yourself of what you wish you had done differently. Even better, share this information with your financial advisor, your spouse or a close friend. Let them help keep you accountable.
One of the most important elements of investing is what you do or don’t do when the market falls. Making wise decisions now allows you to enjoy success in the future.
The Bloomberg article on Monday, August 24th leads with the line: “Panic. Judgment Day. Carnage. Meltdown. Fearful. Depressing. Psychologically Draining. Wired.” These are words money managers used as they tried to process the effects of the current market downturn. I had a client meeting the same afternoon. Reading the headlines and the words used to describe investor fear, you would expect the mood of this meeting to reflect that.
“Upbeat. Excited. Anticipation. Calm.” These are the words that I would use to describe my meeting.
This meeting was special because the husband is retiring in three weeks. It is likely the last time I will see this couple before they both are officially retired.
Wait, a meeting finalizing a retirement during such dire market conditions and those are the words used to describe it?
We had a plan for how my clients were going to retire, regardless of what the market was doing. In fact, we planned for exactly this scenario; what would happen when the market fell. It’s simply coincidence that the market fall is corresponding with my client’s retirement.
Here are the reasons my clients have confidence as we go through these rough market days:
They have perspective
We did talk about the market downturn, but my clients recalled the lessons they learned in 2008 and the years prior to that. They discussed how their experiences have given them perspective on what they hear and see in the news now.
They have a plan
This couple knew what they wanted their future to look like and took steps to plan for it. We have been working together for several years and this is simply an extension of the plan we created for them to retire. We considered their social security, their strategy to take money out of their investments and what retirement would realistically look like for them.
But this didn’t all just happen recently. My clients have been saving diligently with their 401(k)s for most of their careers. They paid off their house and continually made saving a priority.
They control what they can
My clients had calculated how much they needed to maintain their lifestyle in retirement. To that end, they monitor their spending by tracking their monthly expenses. They know the potential costs of long term care and other liabilities and they’ve insured for them. They are aware of the uncertainties that come with retirement, but they’ve done what they could to prepare.
Don’t get me wrong. Market downturns are a big deal. They are unnerving at best and it’s important to pay attention to them. But planning is even more important. Planning for retirement is what separates the panic, carnage and meltdown from the joy, peace of mind and excitement of retiring on your terms and your timeline. When you take control of your finances you won’t need to worry about market upsets having control over you.
You want a financial advisor you can trust, and not knowing the fees you're being charged makes it difficult to build that trust.