These past few weeks have been chalked full of lessons. Lessons about family, exponential curves, and even lines for toilet paper. But one of the things that has caught my attention is a subject that used to be a bit sensitive to bring up with clients, but it’s not going to be quite the same in the future. Yup, it’s the “B” word. And, no, I don’t mean batrachophobia, which is a fear of frogs. I’m talking about “budgets”. If that word makes you want to stop reading, just think of it as “cash flow”, instead. Seems less awful, maybe? If you are short on time right now and just want a quick summary, the last 2 italicized paragraphs will give you the general idea.
One of the most important topics when it comes to financial planning is the budget. It’s the answer to some of the biggest questions we get asked. Questions like “How much do I need to put aside?” and “Can I retire with what I have?” generally boil down to “What’s your budget?” If I compared it to building a house, then of course the response to “how much wood do I need?” or “will I be able to build it with this pile of wood?” is…”well, how big do want the house to be?” Are we talking a birdhouse or a warehouse?
There has always been a general disconnect between how much we think we spend in a month and how much it actually totals. From our perspective, the question that gets us closest to the truth is “How much do you systematically save into an account?” Because if that answer is…”I just do the match in my retirement plan”, then it’s pretty safe to assume that’s it. If the match is 3%, then the other 97% of the income goes to taxes and expenses. And it can be tough to continue 97% of our income through retirement.
When we then ask, “How much more do you think you could easily put away for other goals?”, it’s pretty normal to get a “I don’t have any extra” or “I could maybe do $25 or $50 per month”. Sometimes it’s followed by a statement like, “except I can’t do that this month because…”
One of the concepts in retirement planning is called “Lifestyle Lock”. It really works in 2 ways; a good way and a bad way. The bad definition of it plays out like this: When someone first entered the workforce, they needed to be cognizant of the costs that could be coming. They may have even figured out just how much rent or mortgage they could afford, and actually penciled through a quick budget to see if it would work. Then, the budget sheet got buried with the other rental agreements. Months rolled by, some costs were too low, some were too high, and they figured out a balance of what they could and couldn’t afford.
Then, little pay raises came and a couple of tax refunds came in from time to time. But, those other costs just kept creeping up. The house “needed some work”, a new car was needed (and there was a little “splurge” because the car was “gonna’ be owned for 10 years”), and what used to be fast food for date night now sometimes has a 3 digit price tag attached. The lifestyle “creep” was real. It wasn’t done on purpose, it just happened slowly. The budget sheet never came back out, a discussion about goals or direction wasn’t had, and it’s tough saying “no” to things in the “here and now”. After all, we deserve this! And YOLO (You Only Live Once)!
- What’s important to you?
- Do you have a budget?
- How much are you currently saving?
- What motivates you?
- Why are you ready to do something now?
- Do you think you could save 10 or 15% of your income if we found you needed to?
Ugh, that’s tough, remind me why we decided to go talk to that person? 10-15%?! Right now, the number is maybe 3% in a retirement plan. And what’s all this talk about “are you ready to do something now?” Of course, you’re ready, that’s why you’re here! But 15% is so much! I’m not ready for THAT… I mean, that’s close to an extra ~$1,000 per month, it’s just not feasible. Maybe let’s just start with $50 or $100/mo and “see where that gets us”. Then months, maybe even years, go by.
You pickin’ up what I’m laying down?
Yup, the 10-15% savings rate is probably not enough once more time passed. And it’s only going to hurt more as time goes on to not have such an “income cliff” to fall off at some point in the future. But so much of the “lifestyle” is just too “locked” to mess with. Vacations and trips are habit, expensive renovations keep happening, and cheap in-home dinners are not as common as they used to be.
Cutting expenses is painful and we may resent those decisions. There’s backlash from friends or family. There’s not as much shopping, economy cars don’t quite “compare”, and maybe we would have technology that’s a bit outdated. “Status” has made its way near the top of the priorities.
Then, COVID-19 happened. Jobs aren’t as secure. Spending has plummeted. Unemployment has sky-rocketed. People are cooking more dinners at home. Dining experiences are outright closed. Vacations are cancelled. We are doing things at home that we always could, but were never actually forced to. Did the world just reset our lifestyle? Because nothing seems “locked” anymore. There’s not as much FOMO (fear of missing out) when most of our friends are home watching dadosaur videos and eating expired pantry food just like us!
Here’s the good definition for “lifestyle lock”. It used to be ideal for younger people battling to set aside 10-15% with everything else eating so much of the income. But now, it’s for anyone who wants to make significant strides toward their future financial health. It’s about “locking” the current (low) lifestyle in at that level. Of course, some costs go up without our authorization. But with every pay raise, tax refund, and gift card, use the vast majority of that additional money to put toward those future goals. The gift card doesn’t have to be an “extra” night out, it could take the place of your current one and put that night’s budget into savings or another worthwhile goal. It’s not buying the more expensive car just because you got the pay raise. It’s not getting rid of that “starter home” for a much larger payment.
Don’t let the “lifestyle creep” happen with that extra income. This is where the “pay yourself first” saying comes from. Before you make a budget for anything “discretionary”, make sure that your future goals are being addressed. This isn’t new advice, but it’s awfully current. Forgoing putting away a retirement contribution one year for a “not needed” expense means also reducing your chance of “not needing” to work down the road.
So does “lifestyle lock” work? Well, yes and no. It works because the people who take it to heart, implement it as part of their ideology, and have a similar budget for lifestyle 10 or 20 years later are now putting more money away for retirement or other expenses and are making significant strides toward their goals. But it’s hard to make those decisions constantly. It means making those choices every day when getting in our 10 year old car, every week when picking “the same” restaurants, and every year when choosing vacation destinations. It could even mean doing the very controversial thing of adding the gift card as a part of the dining out budget and taking the previous “cash” allocated to that for something else…or even…saving it (gasps). Yes, there are people that do that and they aren’t insane (at least I don’t think so). Gift cards are a fantastic illustration of lifestyle creep. Why does a gift card seem to give us immediate permission to raise our lifestyle by that additional money? Why can’t it replace a previously allocated date night?
Does financial success mean we ever really avoid needing to say “no” to those things? I don’t think so. But does financial success mean we never say “yes” to “nice” things in life? I also don’t think so. It depends on your definition of “nice”. I know many people driving a 10+ year old car with enough money in their checking account to buy a Ferrari. Technically, they say “no” every day to a new car. Do they think it’s hard to do that every day? Well, it may have been harder at one point in their life, but I doubt it even crosses their mind today. Right now, they aren’t going to buy a new car until their 15 year old Toyota’s repairs are costing more than a new Toyota’s car payment would. Their ideology is pretty concrete at this point. Driving that car means they can afford other things right now, or stockpile even more away into savings. When they do need a new car, they just might buy a brand new Toyota. The previous one lasted them 15 years, had cheap repairs, and they still sold it for $2,500 after all that time. They might even splurge for leather seats this time, that would be “nice”.
Our budget is like our plate at a buffet…except we are 4 years old and our parent covers half of it with veggies at the very beginning. There are some “wish I didn’t have to” expenses that are going to take up a chunk of our plate, whether we like it or not, but we get to “fill in” the rest of the space. Can we load the rest of our plate with mac and cheese? We sure can! Would that be “wise”? Well, you’d have to ask a dietician about that one. But if we want to keep a portion of our plate “unspent”, we may need one of those divider plates to keep that cheesy goodness from oozing into everything else.
As many of our budgets have been “reset” recently, consider revisiting priorities and see if it’s given you an opportunity to “reset” that lifestyle a bit. I mean, we’ve been cutting our own hair and wearing pajamas to our kitchen table video conferences in front of a shower curtain rod with some random sheet draped over it for the last month and a half! So nothing seems “locked” at this point. Use these recent shutdowns as an “excuse” if you want to. That it’s taught you how you may have a healthier lifestyle by not eating out all the time. That you’ve learned just how much “extra” was in the house that you’ve been staring at for the past month. Or how you haven’t missed the expensive trips as much as you thought you would and that trip down to the beach to watch bioluminescent waves was enough. Even use this very article to place the blame on me if you have to. After all, we do only live once, so doesn’t our future self deserve it? 🙂
Until next time!
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including loss of principal.)
California Insurance License #0G24740
17742 Irvine Blvd #200 | Tustin | CA | 92780 p | 714.832.6763