“Money isn’t everything.”
“Money can’t make you happy.”
Both of these jewels of advice are true, but what’s also true is that if you don’t have enough money, money really can feel like “everything.” And while money can’t make you happy, not having enough of it can definitely make you unhappy.
So, though money isn’t everything, it definitely matters. It’s something we have to think about.
I am in the final stages of divorce. I knew going in that my financial situation was going to change and I would need to take a good look at my finances. I used to be a financial planner, so I dove into the process relying on knowledge I used to apply every day to my clients.
As a licensed securities broker, I worked with people, mostly retirees, who needed help managing their savings so they could generate a reliable income stream from their investments. But that wasn’t my favorite part of financial planning. My favorite part was when we’d get a temporary client who just needed us to review their entire financial picture and make recommendations to help them manage their own financial life better. I love helping people who are living on a financial razor’s edge to find the buffer between income and expenses that can give them some peace.
Before I start bouncing up and down with excitement on my little financial soapbox, I want to acknowledge that the advice I’m about to give may not work for everyone. I realize that for many people, they already are working as hard as possible while living as frugally as possible and still can’t quite get ends to meet. I see you. My message today is for the folks who have a sense that there might be some room for improvement when it comes to their finances. But hopefully everyone can take at least a small nugget of useful information away from what I have to say.
Time for a checkup.
As I prepared to separate from my ex, I had to examine my own income and expenses. In doing so, I realized that I had let years slip by since I had looked at my finances at all. I found a fairly sizable pile of cash sitting in my old IRA from when I used to work as a financial planner — cash dividends from investments I hadn’t looked at since my 9-year-old was in diapers. That money was just sitting there like a big lump, not earning a dime. I also realized I had been spending about three times too much for my cell phone plan. And that I had been frivolous with dining out.
In other words, I was long overdue for a financial checkup. And maybe you are too.
But I get it. It can be scary to stare your income and expenses right in the face. For many of us, we live paycheck to paycheck, trying to spend as little as we can each month, hoping there’s enough to cover our bills. We might be slowly accruing more and more credit card debt every month, never quite able to pay down the entire balance. We might not even really want to know the details of our financial situation. The idea of knowing just how bad it is can be downright terrifying.
Well, I’ll tell you this: It’s impossible to get a handle on your finances if you’re not willing to look at them.
Knowledge is power, especially when it comes to money.
The first thing you need to know is exactly how much you spend every month. I can tell you from my years as a financial planner, the majority of people grossly under-calculate their expenses. Generally, they’ll sit with a budget they found online and go over last month’s bank and credit card statements, add up the expenses, and assume that’s what they spend every month. This produces an incorrect number every single time.
Most people spend a small fortune at Christmastime and also drop a few hundred dollars on a birthday party for each kid. Many people take some kind of vacation during the year, even if it’s something in driving distance with just a few nights of hotel. Most people’s car will break down at some point and suddenly need $800 worth of repairs. These few items added together easily top $2,400. Your monthly budget has to account for these large annual expenses. If your annual “extra expenses” number happens to be $2,400, then $200 per month needs to be set aside every month, as non-negotiable as a bill.
Because if you don’t have it in your head that this $200 is ear-marked for expenses that are definitely going to happen, you’ll convince yourself you have a surplus in your account at the end of the month. And you’ll spend it. And then when Christmas comes around or your car needs a repair, you’re forced to go into debt and play catch-up afterward. So make sure you get a prorated accounting of your monthly expenditures.
Once you’re confident you have a clear idea of your spending habits, you need to know how much you’re bringing in. If you’re on salary and get paid the same amount every pay period, this is a simple number to attain. Just look at your check or your direct deposit. If you regularly work overtime, you’ll want to get a monthly average of how much you bring in. If you’re a freelancer like me, you’ll want to average out and then underestimate your earnings per month, and you’ll want to have at minimum three months’ worth of expenses saved up in case work suddenly grinds to a halt (everyone should have at least three month’s worth of expenses saved up, but for freelancers this is a big-time must).
Now look at the difference between your income and expenses. When I first did my financial analysis, the gap between my projected expenses and my income at the time made me literally want to puke. Pre-divorce me could not possibly support post-divorce me. I had a huge gap I had to figure out how to close. I needed to work a lot more and find ways to spend less.
I messaged my successful freelancer friends and asked them to share connections. I teach violin too, so I put word out that I was looking for more students. It took a lot of hustling, but I was able to increase my income enough to put a sizeable dent in that gap. Still not enough to meet my need though. I could scrape by, but there would be nothing at all left for any kind of savings. As a financial planner, I’ve seen how important it is to save for retirement. I realize for some people this is impossible, but I wanted to see if I could cut expenses enough to squeeze out a bit to throw at my retirement.
I found a couple of big things. The first was the cell phone bill I mentioned earlier. When I was on a plan with my ex, we were paying $140 per month for just the two of us. That is highway robbery. I did a Google search for cheap phone plans and discovered I could get a prepaid plan for as little as $15 a month. It seemed too good to be true, but the company I chose (Mint mobile), offered a short trial period. So, just changing my phone plan saved me $50 per month. I also realized that I was buying a lot of meat, which is expensive. (Holy crap, it is REALLY expensive!) But my kids and I aren’t big meat eaters, so, post-separation, I found I could save about $75 dollars per month just by buying less meat. We used to pay a pest control company to spray around our house. In my new house, I buy the chemicals and do it myself. That saved another $30.
If you have a deficit like I did, your changes won’t necessarily look like mine. The point is to put yourself face-to-face with the numbers and ask yourself where you can make small changes that add up to real savings. Without seeing the actual number amount of my deficit, there was no way to know exactly how much I needed to work or how much less I needed to spend. Putting the numbers right in front of me made things crystal clear.
And if you have a surplus?
Ideally, your goal is to get to where you have a surplus every month. You want to be able to pay off your credit card bill every single month, never carrying a balance so you never give over your hard-earned dollars to greedy credit card corporations in the form of interest payments. It should be your mission to never, ever give a single penny to a credit card company. Make your purchases and then pay the monthly balance off in full every single month. (Remember, those bastards will make you pay interest on the entire balance even if you pay off all but one penny of it.)
If you have the excellent fortune of having been able to amass three months’ worth of savings and maintain an ongoing monthly surplus, you’ll want to invest the surplus. The amount of surplus you decide to invest should be treated like a bill — a nonnegotiable monthly payment. Have it automatically deducted from your checking account to go right into an investment account (Ally, Schwab, and Fidelity all have low trade fees). So, if you can swing a surplus of $50 a month, you treat that like a bill and transfer it to the investment account every month. Set a reminder on your phone for every few months to use the cash in the account to purchase shares of an ETF (exchange-traded funds). Search for an ETF that tracks with a major index like S&P 500, Dow Jones, or Nasdaq.
If you already have significant funds saved up and aren’t sure how to invest them, or if the idea of investing just makes you nervous as hell, seek the assistance of a financial advisor. Many advisors charge 1% of assets under management annually. I personally would rather manage my investment account on my own than give up 1% to someone else, but many enjoy the peace of mind of having an expert handle their money. Some advisors are willing to look over your financial situation (my favorite thing to do as a financial planner) and, for a flat fee, give you a clear plan for how to manage your money which you will then implement yourself going forward.
It’s so easy for money matters to get pushed aside by the busyness of parenting and work and everything else, but it’s important to take this bull by the horns.
Not only so you can get to a place where you’re saving for your future, but also so that you can have financial peace of mind on a day to day basis. Because, when it comes to money, ignorance definitely is not bliss.
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