We hope that the earlier parts of our series have challenged you to start thinking about more intentional spending and savings decisions, but we really haven’t addressed why that matters or how to do it.  So, let’s get to that.

The purpose of understanding, and managing, your cash flow is rooted in two questions:

  • How much can I afford to spend each year (and still accomplish my goals)?
  • How can I best track my spending?

How much can I afford to spend each year (and still accomplish my goals)?

This is an important question – whether you are still working or already retired.

If you are working, you may be juggling a variety of competing priorities:

  • Saving for retirement
  • Reducing debt (home mortgage, student loans, etc.)
  • Raising and educating children
  • Having some fun along the way (travel, entertainment, etc.)

“How much can I afford to spend” and “How much do I need to save” are really two sides of the same coin. Dollars into your household are either spent or saved. The goal is to save enough each year to meet your long-term priorities while also living enjoyably along the way. How much you need to save will depend on your unique goals (for example: early retirement requires more savings than later retirement; out-of-state or private tuition requires more savings than in-state college tuition, etc.). Developing a sound, comprehensive financial plan will help you quantify these tradeoffs and guide decisions about annual spending and savings.

If you are retired, you may be juggling a variety of competing priorities as well:

  • Desire to travel – especially in the “go-go” phase of the early retirement years
  • Home projects – many clients renovate, downsize, relocate during retirement
  • Legacy, Gifting and Charitable desires
  • Desire to protect against rising health care and long-term care costs

A retiree’s dilemma can be rooted in the tug-of-war between wanting to enjoy retirement while also not spending at a level that threatens the long-term sustainability of the financial plan. Similar to above, developing a sound, comprehensive financial plan can help you quantify these trade offs and give you confidence about your financial future.

How can I best track my spending?

This sounds like a loaded question. In fact, it sounds a lot like….budgeting….yikes, who likes that word?

When most people hear the word “budgeting,” here is what comes to mind: oh, great, I’ve got to go list all of my expenses and admit how much I waste each year. I’ve got to cut my cable package, go on a skinny cell phone plan, eat out less, say no when my friends call to meet for a night out, travel less, downsize my house, clip coupons, look for sales, etc. Basically, have no fun and live like a miser! Maybe it’s time to change how we think about “budgeting.”

As noted above, spending and savings are two sides of the same coin – dollars into your household are either spent or saved.  When it comes to budgeting sometimes one’s mindset matters.

  • Many people are very good at “line-item budgeting” and are able to manage income expense categories in a way that results in a surplus budget that is aligned with required/needed savings.
  • “Strategic budgeting” is another option to consider. This process focuses more simply on the question: “how much do I need to save each year?”  This process focuses less on specific spending categories so long as the savings threshold is met (without using debt to fill any gaps).
  • Note for retirees: “savings” isn’t normally required for retirees.  Instead, the focus for retirees is on whether or not you are taking sustainable distributions from your investment accounts.  This can be tracked in either a “line-item budget” methodology or a “strategic” methodology in similar fashion as described above.

The net result of “line-item” versus “strategic” budgeting is the same: to spend in a way that results in a specific amount of annual savings.  Systematizing how this gets done can also help – automated savings plans for working clients; automated distribution plans for retirees).

Ultimately, the goal is to align our cash flows – our spending decisions and savings rate – with our goals and values.  The good news is that a flexible financial plan allows for tradeoffs among these competing priorities at all times, including when your goals and market conditions change!