A key factor in your financial success is knowing how much you spend. Not to the penny, but with some measure of accuracy, how much do you and your family spend in a year?
Knowing your annual expenditures is critical to your ability to save. How else can you accurately answer these questions: Is your income greater than you are spending? Do you need to make any changes?
When you are in the earlier stages of your life, determining your annual expenses and comparing this to your income is the basis for what you can save and invest. The earlier you can begin to save, the better you will be. You will have greater financial security and more financial freedom. You will be able to have more choices and flexibility. You will not have to take on as much financial risk later in your life.
For clients nearing retirement, a critical part of their financial planning with us is determining how much they need from their investments and other sources to provide the life they want. To do this, we compare their future projected income versus their expected expenses.
Income can come from various sources, usually from distributions or withdrawals from their investments, as well as Social Security, pensions or other retirement plans. We work with clients to quantify these amounts and make reasonable assessments of how much they can expect to generate or withdrawal from these sources, so they will not outlive their assets.
The other side of this equation is how much you will be spending. For many, this is a challenge to determine or estimate. We are not saying you need to live on a specific budget. But the more accurately you can quantify your annual expected expenditures, the better planning we can do.
There are many ways to determine what your annual expenditures are, or will be. The more accurate you can be about tracking or determining your past spending and projected future expenses, the more confidence you will have in the financial planning process.
Determining your annual expenditures can be done in many ways. It does not need to be exact. Using technology and online resources, pretty realistic figures can be quickly determined. Consider what you can gather from just the following:
• Credit cards, over a year or two
• Review your checkbook for large and small expenses
• Mortgage and property tax payments
• Utility bills, which you could be paying through your checking account or credit cards
• Car payments, which are likely linked to your checking account
Many of these records can be obtained for a few years, online, such as credit card statements and bank statements. These will provide you with a good starting point. If you want to go a step further, you can track your finances with an online tool, such as Intuit’s QuickBooks or Mint.com.
As you near retirement, or to plan for your future, you will also want to consider changes or events that may occur in the future. Depending on your age and other factors, these could be things like: how long you plan to work, travel plans, education expenses, changes in your home, major family events and health care costs.
Gathering, reviewing and projecting your expenses provides you with necessary information we can use to help you plan a financially secure future. This information can also be an important step in evaluating how you are spending your money, and whether you want to make changes in your spending habits.
Good data leads to better decisions and better planning. We can work with you to assist in the various aspects of this process, so you and your family can have as much financial security as possible.