Struggling With A Budget? Try This!

Two days ago I met with some clients to update and review their financial plan. These particular clients are 5 and 10 years from their target retirement dates (one gets to retire earlier due to their 10 year age difference). They are highly motivated to save as much money as possible to make their goal a reality.

One of the major factors driving any financial plan is cash flow. Prior to the meeting, one of the clients admitted they had let their spending reach what they perceived as excessive. I believe what followed was a "discussion with purpose" initiated by the spouse, who is 10 years the senior and is sick of the pressure cooker that is his job.

Our meeting started with a detailed 20 minute white board timeline of how I was mapping out their retirement income. After drawing out a somewhat elaborate schematic I could sense they had a heightened sense of clarity of where the money was going to come from, as well as a bit of fear if it would all work out. While we can't control the returns the stock market delivers, we can control how much we save.

This blog post details an easy way an investor can manage a sensible budget without spreadsheets or constantly checking bank accounts. Thanks to the clients I met with on Monday for the inspiration for this post.

You Must Engage In A Financial Plan For This To Work. Without clarity on what level of savings it takes to reach your goals, the potential to sabotage those goals is high. To set the stage, let's assume you have the following financial goals; retire (or stay retired) with a $6,000/month income, donate / gift $15,000 annually, and help your kids pay off their colleage debt ($85,000).

Next, assume that all of these goals are doable with a reasonable probability of success. A financial plan might suggest you take an annual income of $97,000 (enough to pay your living expenses, donate, and gift $10,000/year to kids for student loan debt until it's paid off). Depending on the mix of guaranteed income from Social Security & pensions as well as investment income, the financial plan may actually support an annual income $110,000. In many instances, financial planners may find a client can take a bit more income than just the amount needed to fund their living expenses and goals. Again, the financial plan should have a built in margin of safety to support the long term likelihood of success.

In the scenario above, the planning process defined the possibility of an extra $13,000 in annual income. Now the question becomes how does an investor manage their budget to achieve 1. basic living expenses and financial planning goals, and 2. staying within the alloted "excess" cash flow to have a little fun.

Most Of Us Hate Budgets. I'll raise my hand and admit I'm one of them. It's so tedious and time consuming! Personally, I'd rather spend the time on my bike or with my family. Instead of pouring over your Excel spreadsheet and cross referencing your bank statements each week, try taking these steps instead:

1. Put all your basic living expenses on auto pay. This includes the money earmarked for your financial goals. It's 2015 folks, use that fancy computer of yours.

2. Take the excess monthly amount your financial plan supports and have it auto transfer to a secondary checking account. Establish a text message system with your bank in order to alert you when you're approaching your pre-defined spend limit. Most banks have this alert option, or at least an email feature designed to accomplish the same thing.

Normally I favor financial simplicity, but in rare cases adding a sliver of complexity like a 2nd checking account helps keep things organized.

Create A System Of Spending. If you structure your cash flow into two buckets, one for committed expenses and one for discretionary expenses, you've accomplished the following; the likelihood you'll meet your financial goals remains high, your bills get paid, you get to not feel bad spending a bit of $$$ on life's little splurges, and you save time.

The philosophy here is you've established exactly what it takes to accomplish your goals, and you have clarity with a system that allows you to have some fun. If you stay within the limits of your "fun" checking amount, the next time you want to eat out, buy a $250 pair of shoes, or buy a $150 lunch for your family at the ski resort you won't feel bad about your decision. You'll have cash flow clarity! You could even allow your "fun" checking account to build up over 6 months, then blow it all on a spur of the moment trip somewhere you always wanted to visit. How cool is that!!!

There Are Several Reasons To Hire A Financial Planner. A financial plan should help you gain clarity, feel organized, and illustrate what it takes to reach your goals (along with an analysis regarding insurance, taxes, debt, etc).

If you don't have the kind of clarity I've described above, what's holding you back? I could tell you to get over any financial "baggage" or I could tell you something like "attending to your finances takes about 3 hours per year", but I'm not sure this kind of thing motivates most people. It's not up to me if you take your financial plan seriously. It comes from you, like it did with the clients I met with on Monday. Motivation comes from within. I'm just here to help you commit.