Written By: Kevin Reardon, CFP®
The financial press has been reporting a growing concern that people think the markets are too high. The implication is that if the markets go down, a person’s lifestyle will be impacted, and that’s a problem! The reality is market performance is not the main factor that impacts the success and failure of a financial plan. The number one factor is actually our spending. Spending is far more important to your financial viability than the amount of assets, rate of return of your portfolio, and the inflation rate of expenses. The good news is that, unlike the stock market, we CAN control our spending.
What the financial press isn’t reporting is that we have a growing problem when it comes to consumption, buying patterns and our budgets and it is impacting every economic class of people, including high-net-worth people like you. This is not a new problem, but rather one that has been slowly gaining traction over the years. In fact, we wrote a blog article about this topic in late 2018, which you can read here. The historic blog is still applicable today, but we have seen a few significant factors that are new or accelerating.
As a kid growing up, I recall going with my mother to the grocery store. As one of seven children, grocery shopping was no small task. Even a 10-year-old boy provided some value simply because I could push the second grocery cart required to hold all the needed food. I vividly recall getting to the checkout counter and putting certain groceries to the side if our bill exceeded the allotted amount. When was the last time we looked at the price of an item and put it back? When was the last time you looked at the price of an automobile and decided it was too expensive? Spending an extra $10 at the grocery store will not break your budget, but consistently spending tens of thousands of dollars more on a constant basis will.
There is an economic principle called Opportunity Cost, which measures what else we could do with our money if we did not do something else. In other words, the cost of the new automobile is not just the $70,000 that we pay today. Rather, we need to look at what else we could do with that $70,000 if we did not buy the car. The reality is that $70,000 vehicle will cost hundreds of thousands of dollars in lost funds in the decades that follow if we kept it invested and continued to drive our existing car. I’m not saying you shouldn’t buy your next vehicle, but rather be aware of both its current AND future cost.
‘I Want It Now’ Syndrome
The concept and benefits of deferred gratification has lost its luster and it is quickly being replaced with the ‘I Want It Now’ syndrome. Historically, people would budget and save to make meaningful purchases, frequently saving up for more than a decade to purchase big ticket items. Today, there is a growing trend to buy now and figure out the implications later. So how can you tell if someone is suffering from the ‘I Want It Now’ syndrome? Frequently you will hear rationalizations that go with big ticket purchases, which may include:
- “Why should I wait until I’m older to enjoy myself?’”
- “I might die next week. I’m going to spend the money while I am here to enjoy it.”
- “I work hard. I deserve it.”
- “You only live once (YOLO).”
- “…but my kids really enjoy it and they won’t always want to spend time with us, so that’s why we bought it.”
Not everyone who makes impulse buys or rationalizes their decisions are over-spenders. It is those who do it frequently or in a large way that suffer from the ‘I Want It Now’ syndrome.
Disregard for the Future
I recall reading an article in Money Magazine a few years ago, where the journalist interviewed a married couple, had their finances reviewed by a local financial advisor and offered recommendations. The couple articulated their financial plan was on track until they ran into an unexpected expense. After further dialogue the unexpected expense was their teenage son going to college. The sad irony in the story is both parents had PhDs and were college professors. The thought that their son, who grew up in a household that valued education, would go to college had not entered their mind over the previous 18 years and they did not budget for this expense.
Today, people seem to disregard future expenses, both known and unknown. We know we will need to replace our roof at some point in the future, as a roof has a finite life. We know a married couple age 65 will spend upwards of $300,000 on medical expenses before they die, and frequently a much higher number if there is significant long term care illness. We need to budget for future expenses and understand this will impact our current consumption.
30-Minute Budget Challenge
Many people believe budgeting is intimidating and time consuming, but it does not need to be. Consider our 30-minute budget challenge – it is really simple! Login to your credit card company and record the spending number for the last 12 months. Do not worry about where you are spending money, simply record the amount you spend each month. Next, grab your year-end bank statement and record the amount from checks and withdrawals you made from your bank account last year, including auto debits like your mortgage payment, cellphone payment, etc. Add up these numbers and you have accounted for virtually all your spending last year. How does that number look to you? Is there any purchase you regret? Without looking at where the money has been spent, do you sense you overspend in a given area? What level of JOY did you receive from your consumption? Joy is a much deeper emotion than enjoyment, and when we focus on what is really important in our lives, it will drive our decisions.
The markets are near all-time highs and with it your net worth. If the markets, and your net worth, were to lose 30% over the next two years because we have a bear market, what impact would that have on your lifestyle? The best answer is that it should not have a major impact, but that is only the case if you are spending within your means. Now is the time to review your budget and have a heart-to-heart talk with your financial advisor. Your Shakespeare Team is here for you when you need us.