We are less than two weeks away from the end of 2020 (which we can all agree, probably can’t come soon enough!). As the year wraps up, now is a good time to review your budgeting and expenses over the past 12 months and see where, and how, you spent your funds. If you had a budget you were working in, did you meet your benchmarks? Did you spend more than intended in certain areas or less? Where there legitimate reasons for overspending? If you don’t have a budget, did you find yourself spending more than you thought on particular items/services? Do you want to get your expenses in order or under control? Use the answers to these questions to help guide you as you prepare your finances for 2021. If you find your expenses or spending habits make you a bit uncomfortable, you may want to consider getting more serious about budgeting. If you need help with getting your finances in order, I encourage you to meet with a certified financial planner or wealth manager who can help you both organize your money as well as place it in a spot where it can grow or help your future.
Did you know that the total amount of student loans held by Americans is larger than that of credit card debt? That may be a bit surprising to some. While I am well aware that most of my clients and readers of this blog are beyond their student years and probably paid off their student loan debts years ago, it’s still worth talking a bit about as the topic has become relevant over the past few years, particularly during the recent election season. There has been a lot of discussion centering around how much student loan debt has impacted the spending habits of younger generations and possibly hindered their interest in buying homes and starting families, as well as spending on big ticket items in general. Heck, there’s a really good chance that you have a child or grandchild currently paying off students debts, so for some of my readers it might just be a personal topic. Ideally, those younger generations would find jobs that pay enough to efficiently pay down those debts and allow them to save up for those big “adult” purchases (i.e. a car, a house, etc.). However, more often than not and for a number of different reasons, that is not the case. So, what does this have to do with you and your financial/retirement planning? Well, probably nothing, but it is worth noting. Furthermore, it may have long-term impacts such as slower economic growth as fewer younger people are spending on the large ticket items that can help fuel booms. Furthermore, if you have kids and grandkids weighed down by student debt, you may want to talk with them about their situation and educate them about what they can do to better their situations. Maybe they need a second job or maybe they need some guidance on smart spending habits. Whatever it is, don’t be afraid to help them get on the right path. Also, if you were planning on relying on your children to help with your retirement, such as moving in with them or having them pay for some of your needs, you may want to know whether their student loan debt early in their adult lives may have long term impacts (i.e. they aren’t able to save enough for the future). Lastly, if you are a retiree considering going back to school–and yes, they do exist–you will want to know whether taking on any student loan debt is doable. Obviously, you really only want to go back if you can do so without taking out any loans, but if you can do so for a small amount, it may be worth considering. Again, while you may not be directly impacted by student loans, it may have a long-term impact on the economy that affects your portfolio and investments, especially if it takes markets and the economy longer to recover from downturns due to enough people not spending. So, what do you know about the student debt situation and does it impact you?
A majority of the time, personal finance conversations/blog posts/podcasts center around saving. When spending money gets talked about, usually it has to do with paying down debts or making necessary purchase, such as homes or cars. However, it’s important to remember that finance is more than just saving for retirement or to own a home. It’s more than just worrying about debts. Spending is an important part of personal finance as well. Now, I’m not encouraging you to go out and spend like it’s going out of style. What I am encouraging you to do is to be smart with your money and to spend on things that are important to you. Is there a hobby that keeps you active and happy? Don’t be afraid to spend a bit on it. Of course–I’ll reiterate–don’t spend obscene amounts on it, but a few dollars here and there won’t hurt. Being happy and active can go a long way in life and is just as important to your well being as how much money you save. Spending can also be helpful in other ways, such as helping you to build credit, if you are a young saver. Having strong credit can help you down the road when you apply for car loans or mortgages by helping you to secure a favorable rate. The key though is that you don’t get too caught up in saving as you march towards retirement. Yes, you should of course work to meet your retirement saving goals and should save enough live comfortably after you stop working. However, you shouldn’t be afraid to spend a little on yourself. Don’t be afraid to plan a vacation from time to time or buy yourself that new piece to tech to make your life a little more efficient. So what will you spend money on?
Don’t spend more than you make. It’s one of the basic tenants of being financially responsible. Yet, many people don’t realize that such a practice doesn’t mean you have to be cheap. No, you don’t need to drive a cheap car. No, you don’t need to give up a small daily luxury (Starbucks, anyone?). Yes, you do still need to be smart with your purchases. However, that doesn’t necessarily mean you have to be a miser or penny-pincher. Too often, people equate living within their means with being frugal and cheap–sometimes way too much in that direction. Many think that in doing so they will become wealthy and have more money. Yes, that may be momentarily true, especially if they make a lot of money and spend very little, but that doesn’t always play out that way. For example, if you buy a new car that costs $18,000, you’re buying a car that you will probably have to replace sooner than if you bought a higher quality $25,000 car. That’s called being financially responsible and thinking ahead. The price difference is clear, but so too is the quality. What’s most important with such a purchase is whether you can actually afford the $25,000 car. If you can, then you should factor quality into your purchase. This thought process doesn’t just matter for cars, but for all major–and some minor–purchases you make. Living within your means is a sweet spot between being cheap and making purchases that can put you underwater. Also, just being cheap won’t make you rich. Instead, it needs to be combined with two other tenants of financial responsibility: investing for your future and spending on things that you deem to matter most in your life (and making associated decisions). Living within your means isn’t always easy and it may require some tough decisions, but it is easier–and more reasonable–than just being straight-up cheap.
The term “budgeting” usually gets lumped together with the term “saving” when people talk about finances. For many, budgeting is a key part of saving because it limits your expenditures by putting the money that you spend under a microscope. However, it may be more helpful to look at budgeting as not so much how you save your money, but rather how you spend it. This includes analyzing where you spend it, how you spend it, and when you spend it. Focusing on your spending can give you a good idea as to what expenses are really important as well as where you can tighten up your spending habits. For example, you may find that there are certain expenses that may not seem like much, but really add up over time. You may decide that you can live without such purchases and thus make an effort not to avoid them. I know, it may seem odd to focus on spending when your budgeting. However, it’s also not good to get all wrapped up in saving while budgeting. And of course, you also don’t want to let budgeting dictate your life, so don’t be afraid to live a little from time to time (and within reason!). So, in summary, when it comes to budgeting focus on your “spending” and don’t get too wrapped up in the “saving” aspects of it. Of course, if you need help with budgeting, you should speak with a certified financial planner or wealth manager.
Many Americans tend to splurge when they get into retirement. After decades of working and saving, they’re reached the promised land and want to make the most of it. That spending usually comes in the form or vacations and luxury items (A new Mercedes anyone?). While it can be nice to treat yourself to a retirement present, you need to be careful about how often you do so and how much you spend, especially during that first year or two of retirement. As I’ve stated in recent blog posts, those first few years of retirement are crucial to setting the tone for the rest of retirement and can have a huge impact on how long your nest egg lasts. This doesn’t mean you have to be super frugal when you first enter retirement, but rather that you should be smart with your money. For example, you know that you want to take a nice (or prolonged) vacation during the first year of retirement, then make that decision a few years in advance. As part of that decision, save money separately for that trip or cut back on certain expenses to free up some extra money for that trip. Also, try to set a realistic budget for the trip so that you don’t overspend. Remember, chances are that once you get to retirement, you won’t have income to make up for any overspending. However, that doesn’t mean you shouldn’t give up on your retirement dreams either, but rather that you should just be smart about them. Budgeting can be a very helpful in making your dreams a reality while also not breaking the bank. If you need help with getting your retirement expenses in order or want to better organize your nest egg so that you can take that trip-of-a-lifetime, then you should speak with a certified financial planner.
How often do you go to Starbucks? Are you one of those people that gets take out for dinner multiple times a week? Do you ever bring your own lunch to work? These types of expenses may seem like little things–$5 here, $10 there–but they can really add up over time. Over the course of a year, those expenses can add up to $100s or, more likely, over a $1,000 of dollars. That’s a lot of money. Particularly money that could also be put to better use elsewhere, such as going into your retirement account or used to pay down debts (i.e. mortgages or student loans). This may not be a big deal if you are at your max earning capacity, but it may make a huge difference for those just starting out in their careers and who aren’t earning that much. This post is also a nice reminder that you should review your spending habits from time to time to make sure that you aren’t unnecessarily spending money on things you don’t need to spend money on. Maybe you don’t need to stop at Starbucks (or the local coffee shop) every morning or maybe you could start eating dinner at home multiple times a week. Taking the time to find these expenditures and correct your spending habits can free up a lot of money for you. Aside from going through your expenditures line by line, there are also numerous apps that can be used to track expenses by tracking your credit card and debit card expenditures. You can use that information to determine what expenses to cut out or where you may need to cut back. You don’t need to cut out all those little things, but you may want to cut back or be more cognizant as to where and how you spend your money.
There are different rules for accessing money in different types of retirement savings accounts. If you have a traditional IRA or 401(k), you probably know that you can’t access your money penalty-free until you reach age 59 1/2 and that with a Roth IRA, you can pretty much access your principal contributions at any time (with some exceptions). Thus, it can be tempting use that money sooner than intended, especially when there are not penalties for accessing it and it appears ripe for the taking. However, that doesn’t mean you should. Before you take out money from your retirement account, even if you are actually retired, you really should ask yourself: Do I need to do this? Is this an necessary expense or item? Now, there will obviously be necessary expenses and you most likely will be responsible with your money, but that doesn’t mean you might always be making the right decisions. It’s important that you realize that every dollar you take out of your retirement account and spend is one less dollar available to put towards investing and growing your nest egg, which is key to guaranteeing that your retirement savings last. You may also realize that the expense you are covering with retirement funds may be able to be covered from money elsewhere (i.e. a savings account or investment portfolio). While I am not discouraging you from using your retirement funds properly or as intended, I just want to make sure that you are using it as a last resort and to cover the expenses they were intended to cover. If you have questions about whether you are using your retirement savings properly or want to set in place a plan to save enough to cover your expected expenses, you should talk with a certified financial planner.
Most retirement planning advice is centered around accumulating funds and money to get you through retirement. After all, if you don’t save enough to retire on, you won’t really have much of a retirement. However, accumulation shouldn’t be your only focus when thinking about retirement. Along with accumulation, you might also want to think about “decumulation.” Yes, it does sound like a made-up word, but it is actually a commonly used term within the retirement planning industry. Don’t forget too that how you plan to decumulate–or, more likely, spend–your retirement money can be very important and will involve some planning. When you think about decumulation, you may find yourself thinking about things such as taxes, investments, or income. For example, you may consider how taxes will impact your retirement savings when you go to spend it or how certain investments may add money to your nest egg to offset the money you decumulate. How you spend your retirement funds can be just as important as how you save them. Decumulation plans can help to ensure that you aren’t spending more on taxes than you need to and that you have enough saved (or generate enough income) to get you through retirement. If you need help on forming a plan for you how plan to spend your retirement funds, you will want to speak with a certified financial planner.
Making your money last is a big concern for many heading into–and those currently living through–retirement. One of the most efficient ways to make sure your money lasts is to budget and control when, where, and what you spend your money on. If you are concerned about whether your money will last in retirement, you may want to consider learning how to properly budget. Better yet, learn how and practice budgeting before you retire so that you have the skills and system down. Budgeting often takes practice as it is usually not a skill that can be picked up cold. By practicing well before you need to use the skill you can see what works and what doesn’t. Technology can be a big help with budgeting. There are many apps out there, along with articles reviewing those apps, that are designed for budgeting purposes and can be an easy way to track your spending and help you organize your finances. If you work with a financial advisor, you can also ask them for budgeting advice and help, especially if you are just getting started. Taking the time before you retire to master budgeting can help make retirement a much more enjoyable and worry-free experience.