by Glenn J. Downing, MBA, CFP®
The foundation for any sort of financial planning begins with cash flow management. Income -expenses = dollars available to be invested toward future goals. We’ve worked with people from all walks of life who have cash flow issues, including those with very high incomes. It all comes down to the same thing: you have two choices. Increase income or cut expenses to make savings happen.
To frame the thinking here, I challenge clients to separate out necessary spending from discretionary spending. Necessary spending is just that: what must I spend to house myself, feed myself, clothe and groom myself, and get back and forth from work. Bare bones, in other words.
The exercise I bring to my readers then is this: Let’s look at every expenditure you’ve made in the last several months. Now sort them: necessary or discretionary. Here’s a basic list:
Electric bill Housekeeper
Water bill Exterminator
Homeowner’s Insurance Life Insurance
Property tax Disability insurance
Association fee Tuition
Mobile phone Children’s activities
Home WIFI Lessons/tutoring
Car payment Restaurant meals
Gasoline Snack food
Groceries Adult beverages
Minimum debt payments Cigarettes and tobacco products
Daycare Gym membership
Clothing Sporting goods
Prescription drugs Gifts
Basic toiletries Dry cleaning
Haircuts Dress shirt laundry
Online subscriptions (Netflix, etc.)
Print subscriptions (NY Times, etc.)
Pet food and pet expenses
Travel and vacations
This list has some concessions to modern life, as you can see. I’m listing mobile phone and home WIFI as necessities, since many people are able to and do work at least partially from home. Do you have any other entries for the list?
The vast majority of people, if they stuck to the necessities and some of the discretionary spending, can make their budgets balance. So I leave it to my readers: if you’re not saving enough, scan down the discretionary column, and see what you can live without, in order to have money to save to achieve your financial goals. And it isn’t even so much a matter of doing without as it is substituting one thing for another. An evening at home with good friends and a deck of cards can be much more pleasurable than an evening out at an entertainment venue, and much less costly. A book from the library reads just the same as one purchased. A generic handbag holds the same stuff as a designer bag.
If that still doesn’t work, and you just cannot free up investable funds, then you’ve most likely got some bitter medicine to take, and that’s best done in one big gulp: sell the car; sell the boat; make the hard decisions you already know you need to make.