As a financial advisor, you might think I have some fancy household budget with lots of categories. Well, I don’t. In the past I’ve found that when I set up spending goals for specific areas of my life, they’re always way off – either over or under. So how do I know whether I’m spending within my means?
One way to know if I’m doing okay in the spending department is to track total average monthly spending. I use Mint but I’ve learned that setting up budget categories just doesn’t work for me. Instead, I let Mint calculate my total average monthly spending over the course of a year and make sure that amount includes plenty of saving and does not equal more than my paycheck. Last year I found that average spending number creeping up and it forced me and my husband to identify some areas to cut back (let’s just say this year will involve simpler travel than last year!).
If you are not sure whether you’re spending too much, there are some additional ways to determine the health of your cash flow. Ask yourself these questions:
- Do I pay my credit card bills off in full each month? If not, you are definitely living above your means.
- Am I able to maintain an emergency savings fund equal to at least three months basic expenses? If you don’t have an emergency fund or find yourself eating into it to pay for the awesome boots you bought on sale after the holidays, well…. you get the picture. Keeping this fund at a different bank than where you have your checking account puts it out of sight, preventing a tempting raid for that girlfriend trip you forgot to save for.
- Do I have a good income but no savings? You should be saving at least 10% of each paycheck for retirement or other long-term goals. 15% is even better, maybe more if you have multiple goals. If you aren’t able to save at least 10% of what you earn, every single year, you are probably spending more than is appropriate for your income level.
- Do I have a lot of stuff I don’t really need? Maybe you have stuff in your closet with the tags still on or other items you just don’t use. Sell them on craigslist and work on that emergency fund.
- Do I spend too much on housing? If you spend more than about 30% of your total income, then you may need to scale back or get a second job.
- Do I dine out 5 days a week and waste a lot of food at home? Bad habits around daily life activities can really affect your bottom line.
If you answered yes to any of the above questions, here are three things to do right now to give your financial life a boost:
- Look at your credit card bills and identify all recurring costs and subscriptions (Netflix, the gym, cable, cell phone, iTunes, you get the idea). Which ones can you live without? Cancel a couple or cut back your service. Most of us tend to add things over time but rarely cancel things we don’t really need anymore.
- Schedule a modest auto deposit to your savings account to occur on each pay day. You won’t miss the money and you’ll build up an emergency fund that will insulate you next time you break a tooth or your transmission conks out.
- Increase your 401k contribution by 1%. If you now save 4% of your salary to your retirement plan, increase it to 5%. And make sure you aren’t leaving free money on the table – save at least enough in your retirement plan to take full advantage of your employer match. The earlier you start maxing out your contribution, the quicker your retirement cup will runneth over.
Now pat yourself on the back for making some healthy spending adjustments early in the new year!
Disclosure: Abacus Wealth Partners is an SEC Registered Investment Adviser. A copy of our current written disclosure statement discussing investment risks, our advisory services, and fees is available for your review upon request. Information presented is for educational purposes only and should not be construed as investment advice as the information may not be suitable for all investors. The information does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Abacus Wealth Partners does not provide legal or tax advice. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
