In the January 2019 “New Year, New You,” edition of the Washington Blade, I wrote about making choices to reduce debt and save money. Do I order takeout or make a quick dinner at home? Do I travel abroad for a few weeks or explore my own backyard for some deserved rest and relaxation? Personally, this was something I struggled with, but in the process I learned it is possible to not succumb to the ‘fear of missing out.’ There will always be another weekend getaway, another happy hour and another ‘flash sale.’
A key lesson I learned, and one that you may see value in, is to set smaller, attainable goals. For example, commit to spending no money for morning coffee or breakfast for a week, other than what is already at home. That usual $8 indulgence seems small at first, but over a full work week it adds up to $40 and over a year is more than $2,000. That doesn’t mean you can’t have that latte from your local coffee shop in the future, but the goal is to slowly change habits. A resolution for me in the New Year is to make one small positive change a month, but I can only move onto the next change once the previous has been accomplished.
I want to spend the rest of this column revisiting the advice I gave last year: Set a budget. It is the foundation for those with the spending gene to gain some semblance of insight into our habits. One change from last year, though, is to utilize a service like Mint.com or, if you work with an advisor, they may have a platform to offer you. Most budgeting platforms offer ‘trend’ analysis that can give you immediate access to your spending history. Most services download spending activity from the last two to three months. I would make sure at least two months are fully categorized properly. For instance, Mint.com kept thinking Number Nine was a health service until I taught it otherwise.
Over the past year, I have found it easier to budget with an idea of my current habits. My brain was already formulating little goals like lowering a spending category (e.g. skipping a Thursday night out twice a month) by $100 a month for three months.
Now onto the technical work: First, start with the amount of money you bring in. Do not include one offs sources of income, only your salary or regular expected paychecks. If you work on commissions, you may want to approach this in reverse (e.g. expenses calculates your minimum sales goal), but for simplicity’s sake I would take your average monthly check over the past year, if you think you can repeat the same performance.
Next, subtract ‘fixed’ or required expenses, like rent/mortgage/utilities/health insurance, and the balance is your discretionary budget. The discretionary part of the budget is where those pesky choices come into play. Check into your budget service a few times a week to make sure transactions are properly categorized and see how you’re doing. Toward the end of the month, if you see yourself in ‘the green’ maybe reward yourself.
As you start to generate surpluses (aka ‘savings’), the advice is largely the same as last year: pay ‘bad debt’ first, especially credit cards. I still recommend making weekly payments to your credit cards to more accurately reflect your financial status. It can take months to really improve managing your money, so do not get discouraged if you ‘miss’ a goal.
Once your budget is set, bad debts paid, and you’ve successfully begun to save money, you should start looking at moving this money into a long-term savings vehicle. You should always max out retirement savings like funding a Roth IRA, but make sure you open a non-qualified investment account that allows for you to save for long-term goals. These long-term goals should be those ‘dreams’ like owning a home (usually a down payment), owning your own business, or even traveling the world. The point of the goal is to be so rewarding that it will make that short-term pain seem negligible in the moment.
When you open that account, maybe start with a ‘roboadvisors’ firm that offers lower fees and are largely self-service. However, if you want the more personal touch do not hesitate to meet with a formal financial advisor. It’s the mission of most financial firms to serve as many people as possible, but there can always be a cost to doing that. Do your research and confirm that you are the right match with your advisor. There is no harm in meeting with multiple advisors.
On behalf of everyone at Graham Capital Wealth Management, we wish you a happy and prosperous New Year!