Saving, Spending, and Truth

In 2005, my wife, Cassie, and I relocated to Philadelphia for my career with a global investment firm. At only 26 and 25 years old, we were wide-eyed with excitement for the opportunity to take our professional careers to the next level. In a relatively short amount of time and with lots of long hours, we were making nearly four times more than the median household income in the United States. That is a substantial amount of money in a short amount of time.

Considering Cassie and I are huge planners, we had already discussed and determined our money values, financial goals, professional aspirations, and life timeline for things such as starting a family, furthering our educations, travel expectations, etc. Since, by nature, we are good with money, we were able to buy a beautiful and newly built home, had only one car payment, paid off my student loans, paid in full for Cassie to obtain her M.Ed., and had no credit card debt.

The Money Trap

While we focused on the saving aspect of our money, we turned a blind eye to our spending habits. We regularly enjoyed expensive dinners out, and we vacationed, at least, five times a year. If we wanted clothing or a personal item for no particular reason, we just bought it without blinking an eye. Plus, we were in the season of life where our social circle was getting married; therefore, we spent significant amounts of money on traveling to bridal showers, bachelor/bachelorette parties, attending the weddings, and on the wedding gifts.

Finally, everything changed when Cassie casually mentioned, “So, we are approaching the timeline to seriously discuss having a baby in a year or so.” Since we both agreed on when we wanted to think and try for a baby, I was not surprised by her comment, but it shocked me into taking a deeper look at our finances. Yes, we were saving, but we were definitely enjoying the spending aspect of it more. We fell into what industry leaders call “the money trap”. Essentially, the money trap is described as “the more money you make, the more you spend just because you can”. Some might ask, “What is the problem?” The problem is the more money you make, the more you need to aggressively save toward your financial goals and conservatively spend.

After the initial shock wore off, we delved into how to better save and cut frivolous spending habits. At first, the process seemed daunting and overwhelming, but after a few easy steps, we were well on our way to making better financial decisions. Some of the things that helped us, and what I suggest to my clients include…

Tracking

Most of the time, people do not track every single dollar and cent spent, and this lack of tracking leads to overindulgence. In this age of technology, there are web-based personal financial management resources, such as Mint.com, which can make this easier. Mint is a free resource to help you start accounting for your spending habits. You can link all of your bank and investment accounts and personalize your site. Be diligent and within a month or so, you will have a visual representation of your spending patterns and habits.

Budgeting

With your new wisdom and visual of your spending habits, you can better assess a budget that meets your needs. Typically, I recommend determining an annual budget right before a new year, but you can develop one at any time – just be sure to build in a six month and annual review and update.

While setting up your yearly budget, think of your money values and how you want to save, spend, and invest. You will be required to trim or eliminate certain areas of spending so as to better enhance other areas of your budget. This may lead to spending less on dinners out, coffee runs, the newest and latest gadgets, clothing, or mindless purchases, to devote more money to education, retirement, emergency fund, travel, or other areas you deem of higher importance. A few items to take in consideration for a budget:

1. Specific Financial Goals – Write out your financial goals using numbers and dates to describe how you want to spend, save, and invest.
2. Determine Your Net Worth – Net worth is the difference between your assets and debt, and it provides a snapshot of your current financial position. Knowing your net worth will assist you in identifying your spending habits. Just because you can afford something, does not mean you need to buy it.
3. Dedicate 20% of Income for Financial Priorities – There is a wide range of financial priorities, and they differ for every family, but essentially, this means paying off debt and saving for retirement and an emergency fund.
4. 30% Rule – It is not realistic to solely focus on saving, so the 30% after-tax income rule encourages you to budget for your lifestyle wants such as entertainment, dining, hobbies, vacations, and your other ‘wants’. By giving yourself some wiggle room to enjoy your money, you are more likely to save and

Maintaining

Since a budget or spending plan is not set in stone, it is easy to get off track due to an unexpected home repair or extravagant night out; but getting back on and staying on track is key. Here are five ways to keep your budget in line:

1. Needs vs Wants – Do you need an updated phone or do you just want one? Ask yourself this question when you are contemplating a purchase. If the item is a need within your budget, purchase it. If it is a want, contemplate the weight of your purchase. Can you afford it? Does it make your life easier? Take the time to think about how your purchase will impact your life, and then, decide if it is worth it.
2. Daily Money Minute – This concept comes from LearnVest Founder and CEO, Alexa von Tobel, who promotes setting aside one minute each day to check on financial transactions. This 60-second behavior helps set the tone of your daily spending, tracks budget progress, and holds you accountable.
3. Waiting Period – Spontaneous big purchases can lead to blowing your budget and regret. Before you buy the new shiny ticket item, wait 24 hours to think about it. This waiting period will assist you with determining whether the item is a need and if it’s in your budget.
4. Make a Financial Vision Board – I know this concept may seem silly, but a vision board provides a way to see your goals from a 10,000-foot overview, which can ultimately help you stay on budget and continue saving for your financial goals.
5. Create Short-Term Money Goals – If you solely focus on larger money goals such as buying a house or being debt-free, you’re less likely to reach them. It is important to focus on the larger, long-term financial goals, but also remember to set smaller, short-term goals so you experience some gratification along the way.

The Bigger Picture

When Cassie and I created our budget, we made sure we stayed true to our money values of authenticity, love, service, hard work, and wellness. We knew creating a successful budget required us to focus on our financial situation and not to worry or compare ourselves to family and friends. Before having our first son in 2009, we budgeted for the possibility of Cassie not returning to work, and we continued to aggressively save for me to ultimately reach my professional goal of being of service to others as an independent advisor. Despite our aggressive saving pattern, we still enjoyed feeding our mental, emotional, spiritual, and physical well-being with traveling, books, dining with friends and family, getting a dog, and a gym membership. Over the years, we have reassessed and changed our budgeting needs and wants to align with our current family and financial situation. Some years have been easier than others, but we continue to be financially responsible, aware, and value-laden to make the best decisions for our family. It is not always easy to stay on task, but the reward of feeling in control and stable with your finances makes it all worth it.

In addition, JP Williams is the Founder of Pillar Wealth Group who lives and works near Columbus, Ohio. JP founded Pillar Wealth Group with over 17 years of experience and specializes in financial planning, retirement planning, investment management, risk management, college planning, and estate planning. Contact us today to get started with your financial wellness journey. Contact us today to schedule an introductory meeting!