The Secret to Financial Planning Success

Secret FP Success Header ImagePeople take on their financial planning challenges for any number of reasons: a desire to be prepared for kids going to college, concerns for retirement, a need to take control of debt or spending habits, and everything in between.

While the decisions that each individual and family make will vary, there is one thing that many financially savvy people insist on doing:

They live below their means.

Spending less than you earn is the biggest open secret in finance. But while the idea is simple in theory, in practice it can be a nightmare to implement. Here’s a simple way to help turn this winning concept into a lasting reality.

Turn away from the need to monitor every single dollar

It might seem counter-intuitive, but you might discover that a financial plan that helps you spend less time thinking about money is more likely to succeed.

Instead of tracking every dollar, give yourself the gift of a budget that helps you operate on auto-pilot by tackling your major expense categories instead of getting mired in details. Big recurring expenses like housing, transportation, and debt tend to dominate budgets, so minimizing them from the outset can make it much easier to live below your means — without the stress of constant management (more on this in a moment!)

It works because it’s simply more sustainable.

Just consider how difficult it is to stick to a diet that demands constant monitoring of every calorie and nutrient. While some might enjoy the detail-orientation, most of us can only go for so long before burning out. It’s similar with money: many people believe that a successful budget requires strict adherence to a detailed program. This approach might feel productive in the short run and it certainly makes sense logically, but these “financial diets” often fail for the same reason that many food diets fail: their demands are just exhausting!

That’s why a budget overhaul which starts with the big wins can be much more effective. Similar to  dieting approaches that follow simple rules, like cutting out soda or eliminating processed sugar, they can give you a concrete “win” that makes it easier to stick with the program.

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How to set your budget up for maximum flexibility

Start with your big ticket items — your house and car are obvious first choices, as are your other major recurring costs and debt payments.

Of course, these expenses can’t always be changed at the drop of a hat. You might not want to choose a cheaper apartment or move to a lower-cost area. But consider what you’re spending now and why. If your kids have moved away, do you really need such a large house? If you’ve retired, does it still make sense to have two cars? What could you do with that extra money instead?

Even just doing these kind of thought experiments on your largest expense categories is a good start, because it will help you to think about what you need, what you use, and how you can do better. If you do decide to downsize houses, sell that second car, or adjust your basic living costs in another way, you could immediately deploy the money to your financial goals. The more you can save, the faster you’ll see the positive effects.

But if you decide that your big costs need to stay as they are, that’s okay. Just move onto the next question: where can you save?

Most of us have numerous monthly expenses that could potentially be reduced. Cable TV, cell phone plans, insurance policies, and any number of subscriptions all get charged on auto-pilot, and you might be able to generate significant savings with a bit of re-evaluating and shopping around. Consider if you really want both cable TV and Netflix, or whether a new cell phone contract could save you money. Would your insurance premiums be reduced if you put a few policies with a single provider?

Individually, the dollar amounts may not seem like much, but once you put them together you might be surprised at how much you’ve saved.

The great thing is that once you’ve adjusted your lifestyle or changed a provider or insurance company, you don’t have to make any changes to your behavior. Because these expenses reflect recurring costs, the savings are immediate and permanent. You can still eat at the same restaurants, enjoy the same hobbies, and buy the same groceries. The benefits will still be there.

Of course, now that you’ve gotten started, you can start to think about those other discretionary costs — most of us could certainly reduce our financial “calories.” But don’t put pressure on yourself just yet. Right now, it’s time to enjoy and capitalize on what you have.

Build momentum with the money you save

In order to reap the benefits of all these savings, you should try to put them to immediate good use. Whether that means contributing more to a retirement account, paying down debt, or opening a special savings account is up to you. Just remember that the best choice of action will be the one that helps you meet your financial goals — and the one that you’ll find the most motivating!

In other words, building momentum involves balancing the financially savvy choice with the one that will help you stick to your new lifestyle and even expand on it. The last thing you want is to deploy all that saved money towards something that won’t matter in a few years, or that (still worse) leaves you even poorer.

Instead, take the big win and make your financial goals your priority. You’ll probably find that it’s incredibly gratifying to see small initial steps gain real momentum.

Enjoy your flexibility

Living below your means doesn’t just help you build savings and pay debt: it gives you the gift of flexibility. Want to take a new, slightly lower-paying job? Now you can consider it. Want to take some time off work to travel? Maybe it’s not such a bad idea.

With extra padding in your budget, you’ll have more flexibility to take the surprises of life — both good and bad — in your stride. That’s because you won’t be worrying about every individual penny.

Instead, you’ll be able to stop obsessing about money and focus on the enjoyable part of finance: putting your money to work in the service of your goals, dreams, and long-term plans.

Let Us Help!

We can discuss this topic and more in person at a complimentary appointment. As a bay area retirement specialist we can give you a review and make suggestions based on your retirement objectives.

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Disclosures

The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by United Planners. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.

Neither diversification nor asset allocation can ensure a profit or prevention of loss in times of declining values.

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