For many people, a budget may invoke the idea of a diet. Budgeting doesn’t always mean cutting something out rather it is a guide to alternatives that honor your financial plan.
Why the focus on managing expenses?
We spend most of our earning years saving for retirement so that we will be able to afford our desired lifestyle in retirement. Whatever we save along with social security and other forms of income like pensions and annuities are finite. However
Managing expenses: A Lifetime Endeavor
In the financial scheme of things there are just a few things that we can control and many more that we cannot.
We can control:
Stanley found that income explained only about 30% of the variation in wealth. The overwhelming impact of the other 70% was due to lifestyle.
Likewise, in Morgan Housel’s The Psychology of Money, Housel provides another way to think about expenses and saving. He writes “Wealth is just the accumulated leftovers after you spend what you take in. And since you can build wealth without a high income, but have no chance of building wealth without a high savings rate, it’s clear which one matters more.” That simple statement sums it up.
Why is Managing Our Expenses So Difficult?
Why is losing weight difficult? One of the reasons is we have psychological blindspots when it comes to money, according to the Wall Street Journal.
Managing Expenses Aligns Activities with Goals
We all have different goals, both in life and in retirement. Managing expenses for all of us is an effective tool within our control that helps us achieve whatever goals we desire. An important part of thoughtful financial planning is knowing your expenses to determine what goals are feasible, as well as what choices/tradeoffs can be made.
How do I Calculate My Lifestyle Expenses in Retirement?
Start with a spreadsheet or sign on to Mint (free). Mosaic Fi also provides an expense tracker through our portal for our clients. Gather up your information starting with
Once you have calculated your current annual expenses you can
Benefits of Managing Expenses
Managing expenses helps us control the things we can to give us the greatest chance of success in reaching our goals. Perhaps even more importantly, it provides peace of mind, financial independence, and the freedom of choices.
There are no magic formulas for expense to savings ratios, however, there are a variety of formulas that can be good guideposts.
For example: One of the most frequently asked questions by pre-retirees is “how much do I need to save for retirement?” According to FIRE (Financial Independence, Retire Early) it is at least 25X a household’s annual expenses if one plans to use a withdrawal rate of 4% in retirement. So, if your annual expenses are $150,000/yr, 25X is $3,750,000.
Jenifer Aronson is the Founder of Mosaic Fi.