Taming Expenses May Be Your Answer for Conquering Retirement | Diversified Wealth
By: Andrew Rosen, CFP®, CEP®

This next lever of financial planning is critically important.  Because it likely has the biggest impact of all four, I preach this lever often to our professional clients. Personally, I’ve seen this make and/or break more financial plans than any other factor.

What is it?  Your spending.

When we build a financial plan, I tell people: “The single most important piece of information you can provide is an accurate depiction of how much you spend.”  Why do I say this without fail?  Because, it’s true.

Understanding your monthly outflow is critical in your probability of financial success.   It’s also a look into ones financial “soul.”  Typically within minutes of understanding an individual’s monthly inflow and outflow, we can determine how much needs to be done for this plan to work.

Why so serious?

Understanding (and then taming) your expenses will do many things for your financial health.  For starters, how can you begin to get a sense of where you’re going if you don’t know what it costs to get there?  None of us can predict every last expense it will take to achieve our goals.  But, understanding your base needs (and spending habits) does go a long way towards planning in an uncertain world.

Change – more than just coins in your pocket.

The next important component is change.  It’s difficult, I know.  I mean really, really difficult!  Honestly, I almost never suggest someone lower their expenses as a first plan of attack (unless absolutely necessary).  While I do think it has a massive impact on one’s financial situation, I don’t recommend it because most are able to utilize other tools first (before adjusting their spending).  Many would rather work longer, make more money, or save more – literally almost anything than adjust their current lifestyle.  We are creatures of habit. Once we establish the spending habits, getting us to budge is like pulling Excalibur out of the stone.

Natural athletes.

When I see a new client spending responsibly, I say they are like a natural athlete; one every coach wants on his team.  Those of you fortunate enough to coach your kid’s sports team know exactly what I mean. You have that one child who possesses unbelievable raw talent.  It may not be harnessed yet, but you know they’ll be destined for success. (I’m still hoping one of my children is that star athlete.  As of now, they are more interested in the snacks after the game.)

I feel that same excitement when I get a natural “spending” athlete; a client with endless raw talent, spending way below their means. They have endless potential; however, I find many are quite scattered.  Once we start collaborating, it almost inevitably ends with a recipe for success.  (Get me a Gatorade! I feel my game face coming on just thinking about it!)

Conversely, the most challenging individuals are those with the opposite habits.  These athletes have a horrible backswing and have been doing it that way for years.  It takes time to figure out their bad habits and a LOT of handholding.   Working with these individuals can be very rewarding, assuming they are amenable to change.  However, the climb is higher and the risk for failure increases in correlation.

It’s Science.

Actually, it’s more a combination of math and logic.  But, think about all the wonderful benefits which come out of spending less:

  1. Needing less savings to sustain this lifestyle.
  2. These savings can be subject to less volatile investment vehicles.
  3. There will be less strain on these investments.
  4. Needing less to be happy, thus content on spending less now.
  5. Easier to emergency plan (less to adjust).
  6. Generally able to save more.
  7. Greater flexibility down the road as it pertains to major life decisions.

The list goes on.  The less we spend, the greater our probability for success.  It’s science!

The Tale of Two Clients.

I often find a parable can help accentuate a point.  Therefore, I’ll give it a shot in my “Tale of Two Clients.”

Client A:  This is a 50 year old making $150,000/yr. His spouse makes $50,000/yr. They also have three children.  At the end of each month, they are barely making ends meet.  They have a fair nest egg saved, as they contribute the minimum required to get the match in their 401(k)s. But, they don’t add a dollar more.  There is some residual credit card debt which seems to have been haunting them for years.  Every time they get it paid off, another emergency occurs. That debt piles right back up again.  These are good people who live in a nice home, drive nice cars, and truly care about their children’s future.

Client B: This client is the same age as above. But, these clients only have one working professional in the house.  The wife makes $150,000/yr, while the husband stays home tending to their three children’s hectic lifestyle.  The big difference; however, is they had it ingrained from the moment they met that debt was bad. Thus, they never had accumulated any destructive debt.  Their parents taught them if you can’t buy it with cash, you can’t buy it at all.  As a matter of fact, they’ve already paid off their mortgage on a lovely and affordable home.  Their cars are decent, but older and paid off.  At the end of each month, there are a few thousand dollars piling up in a six figure checking account.   The wife also is maxing out her 401(k) and gets home every night to have a family meal.  These are equally as lovely people with great family morals.

In regards to these two clients, I can tell you I have seen plenty of both of these professional clients.  They are both a pleasure to work with, get a ton of value out of our partnership, and care about their family’s financial success.  The one key difference here is their monthly outflow.  I didn’t even mention what they each have in retirement savings.  If you had to guess, which client is better positioned?  Also, which client do you think will be easier to mold into a superstar athlete?  If you guessed B, then right on! It is client B.

The key to success.

Hopefully, you can better understand the challenges of a high spend rate. I always try to instill good habits in clients.  One of those good habits is to tame spending and increase savings automatically (especially every time you get a raise).

Being a busy professional myself, I also understand the challenges of quelling ones spending (particularly when we put our families first).  We work hard for our money, might as well enjoy it, right?  My goal is to help you understand another key influencer in attaining a responsible and healthy financial lifestyle.  The good news is we do have other arrows in our quiver, just in case getting your spending in check is not doable.

Just remember this: what it costs to be you is where your financial planning begins.  The rest is how we’ll adjust.

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Andrew Rosen

In his role as Financial Planner, Andrew forges lifelong relationships with clients.  He coaches them through all stages of life and guides them to better achieve their life goals.  For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below.

Find out more about Andrew Rosen, CFP®, CEP®
Find out more about Kyle Hill, CFP®
Find out more about David Levy, CFP®