Aligning Spending with Priorities

For the past few weeks, I have written about the first steps required to prepare for your retirement planning. Most recently I recommended that you identify the expense categories you want to establish and track your normal spending patterns for at least three months. Be sure that in those three months all of your expenses are reflected (e.g. insurance or property taxes that may be paid less frequently, and holiday gifts that have impact at the end of the year).

Now that you know where your money is going, establish a budget. Set a number for each expense category you have defined. This new “spending plan” may be more conservative than your current spending habits – especially if you discovered some surprises that beg for better discipline. Now is the time to address any conflict between your short term desires and your long term goals.

Spend some time thinking about what is really important to you when building the foundation for your future. Talk earnestly with your spouse/partner to align your plans. Do your spending and saving habits support or thwart your long term priorities? Make thoughtful decisions about adjusting your spending in order to accelerate progress toward reaching important goals.

Each of you has your own unique needs and priorities to assure you can enjoy your life the way you dream it can be. But I can give you some examples of the adjustments my husband and I made to get our spending in line with our plans for retirement.

· Our library cards have allowed us to reduce spending at the bookstore.
· We shopped for new rates on auto insurance and substantially reduced our rate without sacrificing coverage.
· Prepared/pre-packaged food is more expensive than raw ingredients. We changed our grocery-buying and cooking habits and saved a lot of money.
· I do my own manicures, and my husband does my pedicures. (He said it was OK to tell you.)

One more thought for you… You may be able to reduce your housing expense by re-negotiating your mortgage. If your mortgage rate is already low, consider making payments every two weeks instead of once a month. This won’t reduce your monthly outflow, but will increase of the equity you have in your home by speeding the reduction of the principle on your note.

Apply discipline to align your spending habits with your priorities and your long term goals. Live your life today while planning a full life for the future. One should not exclude the other.

Where Does Your Hard-Earned Money Go?

Most people don’t find budgeting exactly fun. It is, however, critical to expense control and your retirement planning. But where to begin?

We started with an analysis of our spending habits. Ron downloaded months-worth of spending data from our bank’s web site and American Express. He then grouped like expenses together and determined what category names to put on the groupings. Then we started tracking our spending in those categories. You need to do this too, as a precursor to establishing your budget. I guarantee you will become more aware of where your money is going – and in the process will make some surprising discoveries.

Although some of your category buckets will be the same as ours, you will have others we don’t have, and/or may want to track at a lower level of granularity. The categories we use are listed below in alpha order with a little on what they include, where necessary:

· Allowance – Walking around pocket money.
· Books/Magazines
· Car Insurance
· Car/Transportation – Gas, maintenance, and for us city-folk, public transportation.
· Charity – Including church donation or tithe.
· Clothes – Plus shoes and accessories.
· Dry Cleaning
· Entertainment – Dining out, movies, concerts, theater, clubbing.
· Food – Groceries (does not include dining out).
· Gifts
· Grooming – Haircuts, coloring, manicures, pedicures.
· Gym Membership – May also include exercise and dance classes.
· Health Care
· House Cleaning
· Household Goods
· Housing – Mortgage principle & interest or rent, property tax, parking, homeowner or renters insurance, association assessment, home repairs.
· Internet
· Miscellaneous – There’s always something that defies categorization.
· Savings – Money that comes out of your pay and goes directly into a bank account, a 401K, investments, or deferred compensation.
· Telephone – Land line, cell phone (include cell internet service).
· Travel/Vacation – Air travel, hotel, meals, other spending on vacation.
· TV – Cable, DirecTV.
· Utilities – Water, electric, gas, trash collection (be sure you know whether any of these are already included in association assessment fees).
· Wine – Wine and other alcoholic beverages could be included with groceries, but we like to track it separately.

Again, these are our categories and may not work for you. You may have child or adult care, tuition, alimony, debt repayment (loans or credit cards), lawn care, legal fees, or other expenses pertinent to your life.

Start evaluating your spending today. It’s a necessary step before establishing your pre-retirement budget, which will be next week’s subject.

Planning for Your Dreams

Last night Ron and I enjoyed the sunset (and the distant chaos of rush hour traffic) from a serene rooftop lounge in Chicago, and toasted each other with, “We’re living the dream.” Our dream is the culmination of years of planning and decision-making. We know how we reached our goals, and are happy to share some ideas with you.

The first step in any plan for the future is to get a handle on what your expenses and spending patterns are today. Use this as the basis for establishing a realistic budget. Start by tracking spending against a budget to create more awareness about where your money is going.

You can document and analyze your ongoing expenditures with an Excel spreadsheet – or a piece of paper for that matter. To some extent, HOW you pay can ease your tracking efforts. If you deal mostly in cash, you need to save receipts for review. Our preferred methods of payment are a bank debit card and American Express. Both give us detailed online records that we use to categorize purchases for comparison to the budget numbers. (In addition, with the American Express Rewards program we accrue points that are redeemable for gift cards.)

Once you are knowledgeable about your spending habits, you may want to make some adjustments to pull things into line with your saving goals. Looking objectively at expenses in a consolidated form, you may become aware of untapped opportunities to be thrifty and save more for your future.

Below are some examples of “non-essentials” that eat up discretionary income. No judgment intended – just food for thought:

· $25 a week to have a landscaping service = $100 per month
· Internet access on your cell phone = $40 per month
· Premium movie channels on cable that you rarely watch = $30 per month

I’m not suggesting that you sacrifice quality of life today. Just make deliberate choices, weighing your needs today with your dreams for the future. Your philosophies may well be different than ours. None of us truly know what the future will bring, and should live our lives to the fullest every day. (Being a victim of cancer in 2002 changed my perspective on that for good!) We saved aggressively to try to ensure that our retired life could be full and enjoyable, but certainly never felt deprived.

Next week, I will begin a series on the specifics of how we built our plan for retirement. Ron masterminded our plan, so I will be interviewing him to document the approach and some tips you may be able to use.