What Does Your Financial Health Depend on?

by | May 10, 2021

When articles or discussions center around the question, “do you know your number?”, it is usually referring to your retirement nest egg value. Specifically, how much do you need to have stashed away before you can retire and not have to worry about running out of money? I feel like a politician when I answer, “it depends.” But in my experience as a Certified Financial Planner™, the number you really need to know even before estimating your required nest egg value, is the answer to “how much do you need/want to spend annually in retirement?” In my financial planning/investment management practice, I have worked with clients that have no trouble living on $50K/year and those that struggle to live on $200K/yr. You can see how the nest egg goal number for each of them is very different.

Lifestyle Spending

Your lifestyle determines your spending needs and is one of the biggest factors (in addition to your life expectancy) determining whether you are likely to run out of money in retirement. Yet in talking with folks over the last twenty years, most people often don’t know, without spending time calculating it, what their typical expense amount is each month. When people are willing to look closer at determining that number, I encourage them to break the monthly amount down to two categories: wants vs needs expenses. Needs are those costs in your budget that you must pay in order to provide food, shelter and transportation. So, what must go out of your bank account each month without doing anything extra i.e. utilities, gas, groceries, mortgage/rent, insurance, etc. The importance of maintaining your health is also why I firmly believe that costs involved with whatever you enjoy for exercise (health club cost, golfing, walking, etc.) also belong in the “need” category. Wants, on the other hand, are those discretionary expenses that you may enjoy but also know you could cut back on if needed to save money, invest more, or to reduce your spending. You could eat out less, for example, or shop less expensively on clothing.

Tell Your Money Where to Go

One of my favorite lines from Dave Ramsey, creator of the Financial Peace University class, is “tell your money where to go, instead of wondering where your money went!” In other words, you must be aware of your income as well as your expenses so you can avoid living paycheck to paycheck and be able to put away money for short-term emergencies as well as long-term goals (like retirement). This brings us to the B word, budget. Most of us don’t like to track and monitor spending, especially on a regular basis for a variety of reasons. It takes time, at least initially to track and/or monitor expenses. It may not be our favorite thing to do with our time or perhaps we find thinking about money in general stressful. Or maybe we know we aren’t going to like what we find (too much being spent on wants vs needs, too much month left at the end of the money, not enough activity in the areas of saving/investing, etc.)

Tallying Up

Like most things in life, there is not a one size fits all approach to tackling the budget issue. At least initially, you do need to identify categories and typical amounts involved in your spending habits. You could manually record your expenses as you spend and pay bills.  There are several Expense Tracking Sheet options available online. You could download information from your bank and credit card accounts. Or you could use a tracking service like www.Mint.com for example. I find that just the initial experience and going through the process of determining that average monthly spending amount is often more valuable than continuing to track it going forward. If you can take an average of what happened over a period of three months, that often gives you a good ballpark to start with. And a huge bonus of actually documenting your expenses, is that you don’t leave family members in the lurch if someone needs to step in and help you with bill paying down the road. You have taken the detective work out of it for them by maintaining a list of the common household expenses.

Pay Yourself First

So, once you can see “where the money went,” now what? If you are in your working years, you want to be sure you have saving (unless you already have 3-6 months of expenses already stashed away in a savings type of account) and investing (10-20% of your income) as part of your monthly “need” expenses. That is part of Dave Ramsey’s “tell your money where to go” advice. Automating both saving and investing is the best way to take the emotion out of the decision as well as overcome the human inertia issue of not acting on your goals. Set up an automatic transfer from checking to savings or paycheck to 401(k) for example. That guarantees you pay yourself first.   

Reducing Expenses

If you are no longer bringing in earned income, you may need to have more of a focus on cutting back on or being aware of the “want” expenses. Sometimes keeping it simple is the most helpful. The cash envelope approach, for example, can be one way you target the two or three spending habits you are trying to cut back on. One couple I know put $200 in an envelope each month as their eating out budget. When it was gone, they knew they were done eating out for that month. They did the same thing for spending on extra things for their kids. So, they weren’t tracking every expense every month, but they were working on the two areas that they knew historically put them over their monthly ballpark budget. Another couple preferred to break it down to knowing their weekly “want” spending limit. If they kept their weekly splurges (on any category not related to food, shelter or transportation) to less than $100, they knew they were staying pretty close to their identified budget. Both, however, also put the “pay yourself first” expenses on auto pilot (automatic sweeps from checking to savings and paycheck to 401(k)) as part of their monthly “need” expenses to identify those dollar limits for spending regardless of which tracking method they used.

Getting financially organized forces you to look at your financial health a little closer.  This is often a good starting point, whether that leads you to more budget work or something else. Knowing your numbers allows you to treat yourself to your best financial health today. It pays dividends in so many ways later in life!

Marie Burns is a Certified Financial Planner, Speaker, and Author of the bestselling Financial Checklist books. Find Marie on Facebook or contact her at [email protected]

This article was first published at 60 and Me – a community that helps women over 60 live happy, healthy and financially secure lives.