Managing Your Wealth: How to Prioritize Spending vs. Saving

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According to a recent survey, nearly half of Americans have little to nothing in their savings accounts. The great recession took a huge toll on many people in many subtle ways. Certainly, real estate values went down and investments suffered, but there were also jobs lost, and companies held off on raises and bonuses for their employees.

Even though the economy has taken an upturn recently, the effects of the recession are still being felt in a very real way by many working people. In fact, when adjusted for inflation, the average household was making less money in 2015 than they were back in 2003.

What this means in practical terms is that there are many Americans living paycheck to paycheck, and nearly half of the people in this country are completely unprepared to handle a financial emergency. Borrowing money is never ideal, but it is especially problematic when it adds debt to someone whose finances are already overstretched.

How can we address this? Part of my job as a financial advisor is to instruct my clients on how to appropriately budget. No matter how old they are, no matter what job they have, and no matter which financial goals they have in mind, there’s a workable plan for them. It’s just a matter of finding it.

Setting a Budget

Setting a personal budget is a vital first step for everybody. This is true whether you are independently wealthy, or living paycheck to paycheck. The most valuable aspect of a budget is how it helps you concretely visualize the ways in which your money is coming in and going out.

For many, sitting down and listing out all monthly expenses is a very eye-opening experience. You may not realize how much you are spending each month, and you may not even realize what you are spending your money on. Often, we are able to find several unnecessary expenses right off the bat, immediately alleviating some of the financial pressure.

Many people avoid the topic of budgeting because they are concerned that the process will be too complicated for them. This is not true at all. In the age of smart phones, there are dozens of apps to choose from, almost all of them free, which will help you monitor your personal budget easily and quickly.

When budgeting for a family, make sure all decision-makers are in on the plan. Resentment can easily grow if it seems like one person is “in control” of the budget, so I always recommend trading off the title of “budget monitor” regularly.

Prioritize Wants Versus Needs

Everyone has purchases they regret; from cars and vacation homes, all the way down to a candy bar from the vending machine. A lot of spending is emotionally motivated, and advertisers are well aware of this fact. If you have ever come home from the store, not entirely sure why you just bought what you did, chances are pretty good had a lot to do with effective advertising.

Resisting this tendency is the foundation of a solid working budget, and the best way to begin getting things back on track is to separate your expenses into wants and needs.

Your necessary expenses such as housing, utilities, transportation, tuition, groceries, etc. must always be paid first. This will prevent any issues with late payment penalties or unexpected overdraft fees from your bank.

Once all necessary expenses have been accounted for, some of the money that is left over can go to discretionary spending. Make sure your partner or spouse is included on the discussion about discretionary spending, not only to make sure everyone is on the same page, but also to make sure everyone feels it is fair.

Get a Financial Advisor

There are two main reasons you may want a professional to help you with your finances:

  1. A professional will be able to spot trouble on the horizon sooner than you will, and they will also be able to spot opportunities that you may be overlooking. A financial advisor can also help you make smarter use of the money you do have, while opening up opportunities for you to make more.
  2. Spending can get emotional, as previously mentioned. Having a neutral third-party involved can help put a realistic perspective on things.

Remember to always work with an advisor you trust, and who will work in your best interest.

Get Serious about Savings

Discretionary spending can get out of hand when you look at something in a store or in a catalog and think “I deserve this.” You probably do, but the question is: can you afford it right this second? Setting aside a bit of money from each paycheck will help to establish a savings account. Not only does this create a financial safety net for you in case of an emergency, but it also helps to teach and reinforce the concept of delayed gratification.

Perhaps you can get a new watch, a handbag, or some new shoes, but only once you have set aside enough money to pay for it.

Change Your Attitude about Money

Talking seriously about managing your wealth can make people nervous. So much so, that they would prefer to not have the conversation at all – so they don’t. This is not a good mindset to have. You should remember that money creates opportunities, it doesn’t restrict them.

Taking some time to sit down with a financial advisor and discuss your short and long term goals will do several things for your benefit. It can help you establish a budget to make sure you can afford the things you want, and it can help familiarize you with financial terms, and the inner workings of the market.

Many people are intimidated by talk of investing, but there’s no need to be. Investing is just another way of making more money, but you will need a trusted professional on your side to help you navigate the specifics, especially if you are new to this. Don’t make the mistake of thinking that investing is “for older people,” or “for richer people.” It’s a good idea for everyone.

Begin looking at your money as potential for good in your life, rather than cause for worry. Once you get a workable plan in place, you will begin seeing the benefits of taking a more active role in your own finances.
For a more detailed look at how spending and saving could be affecting your cashflow, click here to download our free whitepaper, Back 2 Basics.

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