When it comes to expenses, we all know it is more fun to spend money on things that bring us joy vs. bills and other obligations. When trying to stick to a budget, it can at times be a struggle to feel like there is any left-over cash each month to spend money on the fun things. Especially, when unexpected expenses pop up - like a doctor bill, new tires on the car, or something that the kids need for school. How is it that we can create a plan that allows us to be able to spend money on yourself and the fun things and not feel bad at the end of the month - like you wasted that money or should have put the money towards something else. While at the same time being sure that all monthly obligations and expenses are taken care of. There is more than one way to answer this question and for everyone this is going to be done a little differently. What I want to do today is give three quick ideas on how this can be accomplished and help to lay the ground work to get you thinking on how this can be tailored to your specific needs.
- Pay all obligatory expenses first and then spend everything else on discretionary wants.
This is one way to go about it, but I think it would be my last choice. It does make sure that all of your obligatory expense are covered each month and it will allow you to have the most fun, however it leaves no room for error if next month you have an emergency and no money to cover it. Or, it probably has you living a lifestyle that you cannot afford and at some point this will catch up to you. Lastly, it also probably has you falling short on saving your retirement down the road, which leads me to the next strategy.
- Pay all obligatory expenses and save some for retirement or investments and then spend everything on discretionary wants.
This strategy is a step above the previous one, because it does help to be sure that you are saving for the future and your retirement. One thing it does still fail to do is consider any emergency expenses that may pop up, that like the previous example could put you in a bind. It also probably still has you living a lifestyle that may be out of reach.
You may be thinking, “well, if I am covering all my bills and saving for retirement, isn’t that enough?”. For some it may be, but the biggest downfall to any financial plan that we have ever seen is cash, or a lack of it. Which brings me to another strategy and the one that I think is best of these three examples.
- Pay all obligatory expenses, save some for retirement or investments AND budget in money for discretionary wants, rather than spending frivolously.
By budgeting in what you are going to spend on the fun things each month, this is going to help create a surplus of cash each month, which we like to call an emergency fund. At its core, a good healthy emergency fund is the best part of every financial plan. It allows you to not stress over the unexpected expenses that pop up. The biggest thing that it does is it allows you breathing room. Let’s say you were to lose your job; with a good healthy emergency fund you are able to live off of that while you search for something else. Once you land the new job, you can start building the emergency fund back up. By also budgeting this in, it can allow you to responsibly make a bigger “want” purchase by saving up for a few months and then going out and buying whatever it is that you wanted, thus relieving the guilt from making the big purchase.
Having fun and enjoying the fruits of hard work is important. But it is also important to be responsible and make sure that monthly obligations are what comes first. We aren’t here to be the advisors who say “save, save, save – don’t enjoy your money”, we are here to help provide good sound advice and keep your plan on the right path. That is what our whole “Retire While You Work®” philosophy is based on. At the end of the day, it is your money to do what you want with, we are just here to try and provide a little guidance and to help keep our clients from learning financial lessons the hard way.
As always if you or someone you know has may have questions or for us, we are always here for you and your families!
Any opinions are those of Myles Zueger and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected.