What are your monthly expenses?

It’s a simple question we ask every new client, and one that’s often difficult for them to answer.  But, consider the importance of this basic question:  In order to plan a secure financial future, a key element has to be the amount we spend regularly—the amount that needs to be covered by income.

Clearly, it’s a vitally important area to explore when going through the planning process.

One of the reasons the topic can be difficult for clients is they simply don't have the information readily available.  Some people don’t even want to consider it--maybe they don't really want to know where their money is going.  It truly can be a painful exercise for some, but it's important nonetheless. 

For those who don't already track their expenses, we recommend going back a few months and looking at your bank records or credit card transactions.  From there, you can start categorizing those expenses into basic groups, for instance: utilities, groceries, insurance payments, shopping, etc.  You can also keep track going forward to see where your money is going. 

Most basic spreadsheet programs provide tools to do this, and there are websites that can help also, such as Mint, Quickbooks and the program our clients can utilize, Wealth Connect/eMoney.  Don't forget to consider expenses that are paid on an annual basis as well. 

Does spending decline in retirement?

Many people also believe that once they retire, their spending will actually decline.  While some things may decline, like taxes and retirement savings deposits, we rarely find that normal living expenses decline, especially in the early years.  This is generally because people become accustomed to a particular lifestyle and continue a similar spending pattern.  We also find that people spend money in different places.  For instance, they may spend less on gas and dry cleaning, but increase their spending on vacations and travel. 

Why is all of this important? Consider this example:

Let’s say you decide not to track your expenses and just estimate them, but you forgot some things and you really spend about $1,000 more a month than you thought.  So, in year 1, you are really spending about $12,000 more than you thought. 

By year 20, after adjusting spending by inflation (typically about 3%), you are now short by about $21,000 per year.  If that’s the number used to build your retirement plan and you’re off by $1,000 per month, by year 30 of retirement you would need an additional $571,000 to cover your expected spending.  That’s a meaningful difference and one that, if known, can be addressed and corrected!

All of this is why we urge clients to become as accurate as possible when coming up with your recurring expenses.  Needs and spending patterns may change slightly over time, so it’s also important to re-evaluate your expenses from time to time, especially if you don't track them continuously. 

It may seem like a daunting chore, but the initial work usually takes just a few hours, then an occasional update going forward.  Just keep in mind:  You’re doing something that's imperative for your long-term financial future!