A client of mine called because their budget wasn’t working, and they were coming up short every month. This was eating into their cash reserve. When we looked at what was going on, we realized they made several significant changes over the last few years:
- They moved into a bigger house (well within their budget but all houses come with set-up expenses during the first few years you are living there).
- Their kids have gotten older, which is code for more expensive.
- They purchased a new used car when their lease was up – it wasn’t extravagant.
Finally, we have this little thing happening right now called inflation and while they have healthy salaries, they haven’t received salary increases since inflation started to come at us full force.
These are responsible people who consciously plan for their future. It’s not one thing that got them, it’s a combination of what is going on. Their long-term numbers look good, but they need to bring back harmony to their budget, cash reserve, and long-term savings.
What are some adjustments that can be made for the short term?
A few years ago, I decided I was going to give up eating out for Lent and donate the money that our family had spent in the previous 40 days to our church’s food ministry. My jaw dropped to the floor when I figured out that we had spent almost $1,600 in the previous 40 days. Needless to say, we’ve fixed that situation. Go back through your last couple of months’ worth of statements and figure out where the money is going. It will take a little time, but it will be worth the effort.
Evaluate your situation.
Can you cut back on some of your spending while still maintaining your core lifestyle? This may be as simple as eating lunch out one day a week instead of three. You still get the treat of eating lunch out, just not as often. Can you cut your expense/action by one-third?
Redistribute your money.
You may need to temporarily redirect retirement savings to get cash flow back on track or pay down any debt that may have started to creep up on you. This can potentially have tax consequences, so consult your tax advisor. As a planner, I HATE doing this, but sometimes it is the best option. What is even more important is that you have a plan to get back to where you were.
Post reset, here is what you need to do.
Follow the one-third rule. Any time that you get a raise or bonus - hopefully a cost-of-living adjustment in January - allocate the increase as follows:
- One-third to taxes – okay, you aren’t intentionally choosing this, but it still needs to happen.
- One-third to increased costs of living – inflation anyone?
- One-third to increased savings.
Here’s an example:
- If you receive a 3% raise, 1% goes to taxes, 1% goes to your checking account and 1% goes into savings.
- If you receive a 6% raise, 2% goes to taxes, 2% goes to your checking account and 2% goes into savings.
I have found this to be the least painful way of getting back on track. If you are not used to having the money in your checking account, you don’t miss it.
Life comes at us. Things happen and the best-made plans need a reset. Don’t stick your head in the sand. Get out in front of it and take the corrective actions that you need to as soon as possible.