Here’s a question I often pose to soon-to-be retirees:
“What does it cost to be you?”
The point of asking is to see if you know the cost of your lifestyle. My experience tells me most clients don’t know the answer. I then urge them to track their spending so that together we can build a more thorough income and spending plan for retirement. The more I know what it costs to sustain a person’s lifestyle and fund future goals the better I can advise on any needed adjustments.
My colleagues and I know most folks don’t have the patience to prepare a spending analysis, and most of our near-term retirees are well past the budgeting stage of life. They generally have a ballpark figure in mind of what they spend monthly but may fall short in categorizing their costs. Truth be told – up until recently I was no different. I’ve resisted overanalyzing my spending patterns for years, primarily because I was afraid of what I might find.
But I recently embarked on the quest to discover what it costs to be me. And if I can survive the journey then you can, too.
Where do I start? I thought I would be overwhelmed by the process before I started this project. It turned out to be less daunting than I imagined. The good news is that here are numerous apps to help you budget and analyze spending so you can become a master recordkeeper. One of the most popular apps is Mint which will automatically categorize transactions from linked debit and credit cards. It will even track those charges against a budget you establish. Other apps like PocketGuard, Wally, and GoodBudget are also popular tools for this work.
If you are less inclined to use an app, that’s ok. I’m old school and relied primarily on my bank to get started. My bank’s website, for example, made it easy for me to assemble checking account and credit card statements. They also gave me a snapshot of a year’s worth of credit card charges organized into categories such as travel, food and drink, automotive, utilities, entertainment, etc.
In my case, all household spending flows entirely through a checking account and one credit card. By reviewing a monthly bank statement, which includes ATM withdrawals, ACH payments, and cleared checks I could calculate the total amount of funds spent for the month. To arrive at a total annual spending amount I only had to tally twelve months-worth of bank statements, which was easy to do. Having an annual outflow number, however, didn’t provide me with enough detail to understand where all the money went. I needed more. I wanted to analyze my spending in a more refined manner than what the credit card company provided, and I wanted to further classify the cleared checks and ACHs. Once again, I used an old school method and built a spreadsheet to track my spending using categories of my own choosing. At last, I had something that spoke more specifically to the way Jenny (my wife) and I live. You may come to the same conclusion once you start your journey.
Did I mention the pain? Once I started assigning the outflows to my custom list of categories that’s when joy left the room. Essentially, I looked at each credit card charge, each ACH, and each check on those statements and assigned it to a spending category. Fun? No. Enlightening? Yes. Painful? Absolutely. Ultimately, I consider this a worthwhile use of time because now my wife and I can better see how we have been spending and we can decide whether the way we live currently aligns with and supports our longer-term goals. Spoiler alert: we will be making some changes!
My spending analysis was like looking in the rearview mirror. Everything was in the past. The benefit of building a framework with my own spending categories, however, is that now I have a template for projecting future spending and I can more closely monitor things throughout the year. I won’t budget, per se, but I will have an idea ahead of time how much we are likely to spend on the big categories like housing, utilities, insurance, automobiles, food and beverage, travel, etc. I’ll know whether some unanticipated expense is going to materially affect our plan throughout the year. Importantly, I’m disciplining myself to be more conscious of how our collective spending is moving us toward or away from our goals. From now on, I’m going to know what it costs to be me.
While I generally encourage pre-retirees to track their spending, in fact, this is a good exercise for everyone. Get started by using one of the apps, then decide whether, like me, you prefer to customize your approach. I guarantee you will learn something about yourself through the process. And it may even enable your financial planner to help you become who you want to be.