Living the life(style)
The best lesson this Financial Literacy Month.
Greetings from Financial Literacy Month, the special time of year when talking heads like me inundate you with money tips aimed at improving your financial wellbeing. The infographics, videos, Twitter threads, podcasts, and newsletters (including this one!) might feel like a bit much if you’re familiar with this stuff. But the thing is, most people are not familiar with this stuff. Most people would rather take a five-minute cold plunge than spend five minutes learning about money. So let’s be honest: if we want to make a lasting impact on people’s relationships with money this month, it won’t be from teaching them the nuances between traditional and Roth IRAs. We should begin at the starting line, and take it from there.
Can you quantify your lifestyle? This might sound like a simple question, and in many respects, it is. But personal finance is a game of organization. The more organized you are with your money, the better you can control your financial decisions, which is a key ingredient to achieving and maintaining financial success. The most significant impact you can make over the longest period of time is understanding the price of your lifestyle.
First, you need to determine your lifestyle expense. This is the amount of money you spend on average each month. Knowing your lifestyle expense is crucial, because it provides context for making informed decisions about your spending habits and is a way to measure your comfort (or discomfort) over a specific period of time. It also dictates your capacity to save and invest once your bills are paid. In simpler terms, having a clear understanding of your spending habits allows you to make adjustments aimed toward achieving your financial goals, growing your wealth, and improving your overall financial position.
To start, go on a fact-finding mission to collect your prior year of living expenses. I know what you’re thinking: a whole year? Sorry, but yeah. You really need 12 months of expenses to take into account seasonal spending, such as holidays or summer vacations. Gather your bank account statements, credit card statements, and pay stubs. With this information, calculate your average credit card balance, checking account withdrawals, and benefit costs that are withdrawn from your paychecks (like insurance premiums). Now, add the three averages together to get your monthly lifestyle expense:
Average credit card balance = $4,000/mo
Average withdrawals from checking account = $3,000/mo
Average deductions from paychecks = $500/mo
Monthly lifestyle expense = $7,500/mo
Now, let’s discuss what to do with the monthly lifestyle expense you calculated. While many people immediately start budgeting around this number, take a moment to reflect on your current behavior. Are you comfortable? Maybe too comfortable? Change is hard, so before you make any drastic changes to your spending, it’s important to break your numbers down a bit more so you can visualize where your money is going. Categorize your expenses. Start with the big fixed expenses, like housing and transportation, and then work your way down to smaller discretionary ones, like dining out, clothing, and entertainment. By understanding how much you're spending in each category, you can tailor your budget around your actual spending habits rather than an arbitrary number. You can see where you can make these changes and where you would prefer to not change anything.
As you create your budget, think about your goals. Are you trying to maximize retirement savings without cramping your lifestyle? Are things too tight and you need room to breathe? Are you having trouble saving altogether?
As an example, let’s say you are feeling okay but want to add $6,000 to your emergency fund over the next year. Assuming your income remains the same, that’s $500/mo for 12 months. By understanding your lifestyle, you can decide where that money should come from. Now, no matter what you choose to scale back, you’ll be making an intentional decision. You’ll be in control.
The last thing you need to do is execute, because all the number-crunching in the world means nothing if you can’t follow through. Spend three-to-six months tracking and reconciling your expenses against your budget to see if you're on track. Give yourself sufficient time to adjust knowing that changes don't happen overnight; they are often incremental and tend to build over time as your new behaviors replace old ones. Be easy on yourself and realize this takes practice. You didn’t build your life in a day, so you can’t expect to gain control over your lifestyle in a day, either.
Financial Literacy Month really shouldn’t exist any more than, say, National Shower Month. You shouldn’t need a designation to remind you to shower any more than you need a designation to remind you to care about your money. Learning these lessons are evergreen and will only improve your life(style) over time.
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Succession - Well, here we are. The final season of one of HBO’s greatest series. We’re only 3 episodes in, and my head is already spinning. Truly fantastic acting. I am not even sad that it’s ending after four seasons. It just feels right.
Wanderer Short - It’s starting to get warm in the Northeast, which means we can wear shorts again! I am tall and have toothpick legs, so dialing in on a good pair of shorts that don’t have gaping leg holes has always been a struggle. Then, my wife picked up an amazing pair from AG Jeans for me to try on. They are the perfect slim-fit short that can be dressed up or down and come in variety of colors. Catch them on sale at your local department store, because only bobos would pay full price.
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