Review, Simplify and Have a Plan
As we approach year-end, now is a great time to take an assessment of your financial situation. I know! Most of you probably weren’t planning on that in the midst of the holidays, but in fact, it is an ideal time for a review of the past year and to develop a better plan for the next. This is a great time to look at your retirement accounts, your household budget, your personal savings and your goals and dreams. Be honest. And, if you find you are not making progress towards your goals (retire early, travel, buy your first home), it is time to find a way to save more.
This is also a great time to simplify your financial life. Do you have numerous small accounts that you are trying to reconcile? Are you holding lots of credit cards (10 or more)? If you do, then you are receiving a lot of statements and a lot of individual bills. It will be easier for you to understand your total picture if you find a way to streamline your accounts, your statements and your bills.
And, this is a great time to have a plan for the New Year. Here are some helpful areas that you can look at while reviewing your plan to control your spending and save more.
Get On Track
It may be that you looked at your financial picture and did not feel good about your current position and prospects of an early and plentiful retirement. Then, it is time to get on track. If you do feel good, bravo! Reflect on what has helped you to do well and make sure you can reinforce it. Many people have a bit of both, so be honest with yourself.
If you aren’t reaching your goals or feeling comfortable, it may be time for a new plan. Every $10 that you spend is $10 that you cannot save or put towards a big goal, such a retirement, vacation, a new car. So spending is important because it takes away money from your future self! And, it turns out that many of us spend more than we should if we want to meet our goals for a better future. And, many of us are completely unaware where some of that money is being spent.
Definitely, this is a great time to look at your big expenditures. Can you save money by refinancing your home? Is your home the right size for your life or could you downsize and save money that way? The same question is true for your car. Are you commuting by yourself in a car built for 6? Make sure that you are comfortable with the large parts of your budget and that those things are serving you.
Many of us stop after we analyze our big expenditures, when in fact there are a lot of small, repetitive expenses that can make a big difference in our long-term savings and wealth. It turns out that it might not be bad to go out and spend $4 for a cup of coffee once in a while. But, it is a very different thing if your life has evolved to the point where you buy a $4 cup of coffee every day. In fact, if you buy a $4 cup of coffee daily the cost over 30 years is about $106,348!1 Wow! What if you go out for coffee twice a day? What if your cup of coffee is a premium one that costs $7? Or, you always treat a co-worker to coffee when you go out? It is the habitual nature of this that can turn this small expense into a big expenditure over time!
There are of course other “little” things that people spend money on. If you buy a $7 lunch out daily, the average cost to your savings over 30 years is approximately $186,108.2 That could make a big difference to your future self! It might be a down payment, retiring earlier or traveling throughout your retirement. If you drink one $8 glass of wine out per week, the cost over 30 years is about $42,539.3 Evaluating the long-term effects of your small expenditures requires that you become aware of your patterns of spending. Do you always eat out? Always go out for coffee? Always buy take-out for dinner? Always take a taxi? You are taking from your future self. Certainly you may need to do all of these things occasionally! But, look for things that are robbing you of a more cash-infused future and that aren’t making you that happy.
These types of repetitive expenditures just become part of our lives. We often don’t even realize it. And, we often don’t truly care about the things that we are spending money on. It’s not that a single $4 cup of coffee is going to be your downfall. But, it becomes a very different question if you have a coffee every day. Or, maybe you have a corporate culture where you go out for a coffee two or even three times a day! This is the time to turn that upside down and make some different choices.
What you don’t spend, be sure to save!
It is one thing to realize that you are spending and find ways to stop. But, you also need to be sure to save that money. Remember your savings are for you. Savings do not equal deprivation; it’s about a better future life for you.
Start now. Start small and create a habit. Maybe you calculated that you spend $25/week on things that you don’t really need. Create a way to save that money. You will build a habit and have increased savings. Seeing your savings will reinforce that you are doing the right thing for you. If you saved $100 a month (and earned 8% on it), it could become nearly $41,000 in 16.5 years. Under the same conditions, in 22 years you could have $75,000 and in less than 50 years you could have $731,000. That’s an impressive nest egg from saving $100 a month.
Be sure to save first! Don’t wait to see what you have left at the end of the month. Allocate your savings first and move it to an account where you are saving and growing your money. Then you won’t have a chance to spend it.
Participate in your retirement plan at work. If you don’t have one, fund an IRA. Both of these help secure a better retirement.
And remember you will need more money in the future to live the same lifestyle. Inflation means that the same items will cost more in the future. So you have to save more to be sure that you have enough for the lifestyle that you want. Inflation sounds small, but it is not. If inflation is 3% (approximately the experienced long-term inflation rate), that means that in 24 years, everything may cost twice as much! So your savings are really important to preserve your quality of life!
How Else Can I Control Spending?
So, you are ready to save and have reviewed your budget. But, you feel like you may need just a little bit more help. Here are some other ideas to help you control spending.
First, wait to spend. Most unplanned spending happens in a blink of an eye. You walk by something in a window or in a store and buy it. Your new mantra is to wait. Wait 3 days. Wait a week. Wait 2 weeks. See if that item was really special. Chances are that in the next day, something else will replace it on the “waiting list” and you can focus your attention elsewhere. Rarely is an item so unique and in such short supply that you have to decide at that moment. In our economy almost everything is still available to you.
Second, shop with a list and stick to that list. This keeps you away from spontaneous purchases that you may or may not love next week. It also makes your shopping more efficient! You can spend less time because you have an organized list and once you find everything that is on the list, you are done and ready to go.
For a great holiday strategy, create a plan before the holidays begin. This includes what events you will attend, how you will decorate and which supplies you will need, as well as a gift list. Make this plan and stick to it. It is nice to remember people at the holidays, but you likely won’t need to change your plan mid-course. Keep with your original plan and remember to take the opportunity during the holidays to spend time with family and friends. Those meaningful times will mean a lot more to you and be more memorable for those you spent time with than the fact that you went out and bought everyone a second gift!
Third, take a look at those areas of your budget that reflect premiums you may be paying for your comfort or your time. You may find that you can set your thermostat slightly lower in the winter and slightly higher in the summer and save while not noticing the difference of only a couple of degrees temperature in your house. You may decide to mow your own lawn. Or, you may realize that you can save on gas by bundling errands and shopping trips. All of this depends on your budget and identifying areas where you are spending money, but also identifying areas where you could spend less or save altogether.
Remember to check your progress to stay on track. Are you saving every month? Have you started taking a taxi all the time? Are you eating take-out every night for dinner? If you need to make a course correction, do so.
And, if you are staying on track, remember to take a moment to recognize how good that accomplishment feels. That will help you find more ways to save to get to your goal even faster. And, this level of personal control will help your future self. You may retire earlier, retire better, or both!