One of the interesting aspects of working with folks on their (and their clients’) financial plans is the process of determining what level of spending should be reflected in the plan. While one is working, that spending level is basically net earnings (gross earnings minus taxes and reductions for benefits such as health insurance or perhaps pension or 401(k) contributions). If there is budgeting and thought for the future, there may also be savings beyond these contributions.
Things change a bit when the planning is looking forward to retirement and we try to anticipate what is going to be spent each year and whether the available and projected resources can support that spending. The number might simply be a round number based on what the person or family is earning and spending before retirement or might be based on a number of what we might call usual and unusual expenditures. For most of us, the plan ranks our spending goals by their relative priorities with the understanding that some less important goals may be less than fully funded.
What is important here is to understand which of these listed goals is a genuine need – such as food, housing, health care – or a goal more accurately described as a want or nice to have – such as travel, a new car every year or so, jewelry, season tickets and much, much more. Many of us find it difficult to differentiate between goals that reflect what we want to have versus goals which are things we need to have for our day to day lives. For example, one client told me that it was more important to purchase concert tickets than to pay the utility bill. Needless to say, over time that client experienced significant budgetary problems, a bankruptcy and similar issues which ultimately ended the advisory relationship.
For many of us, fully funding the necessities of life will absorb most of what we expect to have to spend and means that the wants will have to take a distant second place. If they do not, we face the likelihood of running out of money before we run out of time and goals. It sounds boring to some and those folks may take the chance of funding wants with the expectation that they will have enough for the needs as well. However, the boring approach, ensuring coverage of the needs and allowing for a bit of jam with that bread, will save a lot of worry later.
Which kind of spender are you?