Be sure to review your expenses.
We are onto the second opportunity for financial planning during COVID-19, which is the opportunity to review your expenses. Last week, I discussed the first planning opportunity, which is to revisit your goals for whether they have changed or to make sure you are still on track. Since COVID-19 had such significant impact in certain areas, it brought us a good time to check in with what’s important.
Expense Review – Why do it?
I think talking about expenses gets a bad name sometimes. No one likes being on a budget, or questioning their decision to splurge on home furniture, clothes, or travel. I completely get that. For many of my clients, covering their expenses with their income is not a problem. They are at a point of now being at a point in their careers where they are comfortable with what they are earning and have wiggle room with their spending. So, to talk about a budget again can be seen as taking a step backwards.
From a financial planning perspective, expenses are one of the most controllable things you can do in order to achieve your goals (more on that below). When I talk with clients about reviewing expenses and seeing what you are spending, the purposes of this is all about the end result – what is your net surplus at the end of the year that you have available to apply towards your other goals? In other words, you are bringing in X, and your living expenses are Y, and now you are left with Z.
It’s all about the Z!
Take a deep dive and look at all the details.
For example, assume we review your expenses and find an extra $300 a month you can cut out and apply to a Roth IRA. And this was from a simple cut of going out to dinner once a week instead of twice.
$300 a month, for 30 years, which is a total contribution of $108,000 – assuming a 7% rate of return, is a future value of $363,863.
Then, once put into your financial plan, we can directly see how that savings earning the estimated growth rate is projected to have an impact on your plan, and how it ties into what you are hoping to achieve. Maybe it allows you to retire at 60 instead of 65. Maybe it allows you to consider that vacation home. The plan will tell us.
My point here, is again, it’s all about what you have left at the end of the day, month, year, and your actions today are the driver of your plan tomorrow. Freeing up additional cash from reducing expenses is key to a savings strategy!
How can you review your expenses?
There are many ways to review your expenses. I had mentioned that expenses are one of the most controllable things you can to do achieve goals. This is true, but as we know, some expenses are not controllable to an extent. One way to really review this is to separate expenses into the most controllable versus the least, in other terms separating them into “fixed” and “variable” expenses.
Review Fixed Expenses
Fixed meaning, an expense that doesn’t change each month, you don’t have much control over the amount, and is a consistent expense that needs to be paid. Things such as:
- Mortgage payments
- Property taxes
- Utilities (electricity/heat)
- Student loans
- Car payments
- Grocery bill
- Pet expenses
- Medical expenses
You should certainly review these to see if there is a way to lower them, but ultimately, these expenses are here to stay.
Review Variable Expenses
Variable on the other hand, are expenses that can fluctuate every month and you have some wiggle room as to how much you spend on them. Examples are:
- Personal care
- Home furnishings
- Cleaning, lawn service, etc.
- Travel expenses
Being able to isolate these variable expenses allow you to really focus on what you can control, and review if they are necessary. COVID has shifted some of these as well. If you are working from home, you may need to bump up your internet expenses, but you may not be going out to eat as much. You may be able to reduce your gas bill or commuter pass because you are not commuting. You may have more time during the day to work on your lawn and pool yourself, so you don’t need to hire someone. Or, you may not have as big of a travel budget this year.
Questions on the process to review your expenses?
If you are interested in a budget template please reach out and I’d be happy to send you one.
Next week I talk about the third opportunity – which are some tax planning strategies!
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Marshall & Sterling Wealth Advisors, a Registered Investment Advisor. Marshall & Sterling Wealth Management and Marshall & Sterling Wealth Advisors are separate entities from LPL financial.
Opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations. To determine which investment may be appropriate for you, consult with your attorney, accountant, or financial advisor prior to investing.