Shifting Focus to Your Expenses
By Gary Silverman, CFP®
When it comes to investing, the fact that you saved money at all is more important than the return on your money. After all, investment return takes money multiplied by return over time. If you lack the money the return really doesn’t make too much of a difference. If I were to prioritize what was most important to investing, I’d start with time, then savings, and then returns. However, you may have noticed that most of the articles about investing concentrate exclusively on the rate of return. I think it’s time to reframe the conversation.
Recently an article by Michael Kitces (www.kitces.com) reminded me that ultimately we aren’t actually trying to come up with a savings rate but rather a spending rate.
When we create a plan for retirement, the first thing we try to determine is how much spending the family is going to be doing during it. Knowing that, we can then fairly easily (well, with a lot of computing power and experience) come up with how much they need to have saved to get there.
Savings, of course, is what’s left over from your income after you pay all of your current expenses. While it would be amazing for y’all to find a job you love that pays double what your current job does, (or a rich uncle who loves you), we typically have more immediate control over expenses than income.
Your future retirement, your investment returns, and your savings all begin and end with how much you are spending today. So, shouldn’t we be figuring out how much we should be spending?
As a couple of recent columns of conversation between myself and my firm’s President, Michelle Kuehner, showed, there isn’t a lot of guidance in the financial world on what is the right amount of expense. And when there is guidance (such as in the grocery budget we talked about), it is hard to take that and know how to apply it to your particular circumstances.
For instance, how much should a person spend on a house? Well, you’d think that the banks tell you with the amount of the loan they offer. But the banks are not interested in what a proper (we financial people like to use the word “prudent”) level of payments should be, but in what you can pay. What you can spend and what you should are often very different. And trust me, there’s a lot more to this question than just house payments.
So here’s my promise to you: For however long I’m allowed to take up space here in the Times Record News (tell Deanna I’m your favorite), I’ll add a lot more articles about spending in the future. We’ll still look at investing, taxes, economics, and the occasional mention of my running and curling prowess, but interlaced we’ll look in more detail at the spending decisions you have to make and how to make them better.
Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing