Monthly Archives: October 2016

Retirement Planning

I think it’s safe to say that we all have the goal of one day reaching financial independence. That is, the point at which we have enough money in savings and investments to support ourselves for the rest of our lives. So, how much money is enough?

 

Most of the time that question is answered with a single big number. And it’s true that in the end you’re working towards a single total amount of savings and investments. But that total number is composed of many smaller numbers representing the savings you need to support each individual expense.

 

What if you looked at it that way? What if you broke it down by how much money you’ll need to support each expense, each habit, and each indulgence for the rest of your life without ever working again?

 

How Much Does That Gym Membership Really Cost?

 

Let’s look at a single expense. Say your gym membership. And let’s say that costs you $40 per month. How much money do you need in order to support that expense for the rest of your life?

 

Using the 4% rule, which says that you can withdraw 4% of your savings each year with minimal risk of ever running out of money, it becomes a simple math problem. Take the monthly cost, multiply it by 300, and you get your answer.

 

In this case, $40 multiplied by 300 equals $12,000. That is, you need $12,000 in savings to support that monthly gym membership for the rest of your life.

 

Values-Based Decision Making

 

Looking at it this way can help you make more informed values-based decisions when it comes to spending and saving.

 

For example, how long will it take you to save the $12,000 needed for your gym membership? And which do you value more? That habit or the ability to be financially independent a little sooner without it? What about a $500 per month car payment? That will require $150,000 in savings. Is that an expense you’d like to support?

 

There are no right or wrong answers here. The goal is simply to understand how each expense affects your savings need and to make decisions based on what you value.

 

How to Plan Differently

 

Next time you look at your budget, I would encourage you to do a few things differently. Consider the options related to each expense. For example, you could have a $500 per month car payment or a $200 per month car payment or take the bus, let’s say that is $50 per month or walk, $0 per month.

 

Then, for each category, multiply your monthly budget by 300 to see how much money you’ll need in order to support that expense for the rest of your life.

Smart financial decisions

It’s a noble endeavor, but the truth is that we’re all human and we all make less-than-optimal decisions from time to time. Myself included. Here are three examples where I made decisions that were frowned upon by my financial planning alter-ego.

#1: The Big Indulgence

My brother got married. It was a beautiful wedding, lots of fun with friends and family, and he and his wife had a great time. It was also a little awkward for me. As the older, single sister at the time, I honestly felt a little self-conscious.

So what did I do? I spent a LOT of money on makeup: brushes, blushes, two types of foundation, extra eye shadows. I went nuts! It was an emotional decision through and through. It was way more than I “should” have spent, and certainly more than I had planned. But I wanted to look good and the makeup helped me feel comfortable. It may not have been the most rational decision, but it was certainly a human one.

#2: The Overextension

A few years ago I decided to start my business. And while I was excited about the possibilities for how it could grow, there was also a lot about it that I couldn’t really plan for. I didn’t know how long it would take to be profitable, how much of my time it would consume, or really anything else about what the experience would truly be like.

So of course I also decided to start remodeling my house at exactly the same time. Another project with a lot of moving parts, a lot of uncertainty, and a big investment of time and money. Tackling two big goals at the same time caused a lot of stress. I was worried about money, stretched for time, and initially couldn’t give either one the attention they deserved.

My financial planner alter-ego should have told me to take one thing at a time. But in this case my impatience got the best of me.

#3: The Impulse Buy

In early January I got a call from a friend. She was heading for the Australian Open in a few weeks and she had an extra ticket. She was calling to see if I wanted to go. Heck yeah I wanted to go! This was the Australian Open! So without giving it too much thought, I said yes.

Of course, I hadn’t planned for this trip. At all. I hadn’t saved for it. I hadn’t carved the time out of my schedule. And it was only a few weeks away. This was a last-second, impulse decision to the extreme.

Now, I had an amazing time and don’t regret a single thing. But money was tighter in the months surrounding the trip and everything was just a little more stressful. In an ideal world I would have planned for this kind of trip months ahead of time. Sometimes life happens and the planning happens in hindsight.