Skip to main content

Sound Advice: May 5, 2021

Budgeting: The Key to Planning

All of us look to the future and hope for the best, but not everyone makes the effort to collect the data needed to answer the question: "Will I Have Enough?"  Indeed, most people just roll the dice and trust that an optimistic attitude will be sufficient.  Yet the reality is that in most cases the future may not be the most comfortable of times. 

A proper budget and financial plan require input on four key categories: what you earn, what you spend, what you own, and what you owe.  The information needed for three of the four categories is relatively easy to find.  It is the spending that's trickier, sometimes a lot trickier.

Plan for Changes

The hitch with spending is that it needs to be viewed from four different perspectives.  What most of us focus on is current spending.  But then we get into the retirement years and the what-ifs.  The time of retirement is generally predictable.  What is not predictable is the early demise of a spouse (often the key wage earner) and the impact on expenses before and during the retirement years. 

A sensible expense budget encompasses the outgoing cash flows as they are today, as we expect they will be during retirement, and how they would be adjusted if only one spouse makes it into their late 80s or 90s.  Although there is no guarantee, a sharper focus on these alternatives will increase the likelihood of a good night's sleep.

The key items in an expense budget include the following, which are largely fixed for extended periods:

  • Monthly mortgage or rent payment
  • Food and household incidentals
  • Utilities (gas, electric, water)
  • Telephone and internet
  • Property taxes
  • Life insurance premiums
  • Health insurance premiums
  • Home insurance premiums
  • Excess liability insurance premiums

Then there are fixed items for shorter periods, such as:

  • Alimony, child support
  • Auto loan/lease payments
  • Other loan payments

Next, the unpredictables:

  • Health care expenses
  • Legal costs

And finally, discretionary items that may be reduced as needed:

  • Clothing and personal items
  • Property maintenance and upkeep
  • Domestic help
  • Babysitting, child care
  • Entertainment and vacations
  • Books, papers, subscriptions
  • Home furnishings
  • Gifts, birthdays
  • Credit card payments
  • Charitable contributions

These are just the "normal" kinds of expenses one would need to include.  In addition, there are huge variables such as funding for children's education and outlays for major purchases such as those for a larger or second home. 

Education Costs Can Be Enormous

School expenses will be among the biggest nuts to crack.  A child born today may cost as much as $750,000 for four years of tuition and related college expenses.  That's a daunting prospect that will require either hefty savings from Day One, the good fortune of a scholarship or a combination of the two.

The what-if scenarios must be addressed as well.  Downsizing is often worth considering as a means to reduce expenses.  And, of course, several of the fixed items will drop simply because there would be only one person involved.

Once this is done, the process of looking ahead requires an extrapolation of where things are today and the understanding that this is a dynamic process with periodic adjustments needed to stay on course.  It can be a challenging task for individuals and is perhaps best handled with the assistance of a qualified financial professional.

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883 

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

 

Any questions?  Please contact me at nrwayne@soundasset.com

 

Comments

Popular posts from this blog

Sound Advice: January 3, 2025

2025 Market Forecasts: Stupidity Taken To An Extreme   If you know anything about stock market performance, you can only gag at the nonsense “esteemed forecasters” are now putting forth about the prospective path of stocks in the year ahead.   Our cousins in the UK would call this rubbish.   I would not be as kind. Leading the Ship of Fools is the forecast from the Chief Investment Strategist at Oppenheimer who is looking for a year-end 2025 level for the Standard & Poor’s Index of 7,100, a whopping 21% increase from the most recent standing.   Indeed, most of these folks are looking for double-digit gains.   Only two expect stocks to weaken. In the last 30 years, the market has risen by more than 20% only 15 times.   The exceptional span during that time was 1996-1999, which accounted for four of those jumps.   What followed in 2000 through 2002 was the polar opposite: 2000:      -9.1% 2001:     -11.9% ...

Sound Advice: March 10, 2021

The ABCs of Stock Picking After decades of analyzing stocks (and funds) and investing for clients, I'm happy to share in plain English what's involved, what works, and what doesn't.  Keep in mind the reality that successful stock picking is an effort to maintain a good batting average. In baseball, a batting average of .300 or better is considered quite good.  With stock picking, you need to do better than .600, which means you have many more winners than losers. No one gets it right all of the time.  It's not even close.  Wall Street shops all have their recommended lists and the financial media regularly hawk 10 stocks to buy now. Following that road usually is a direct route to disaster.  Don't be tempted. Let's begin with the big picture: The stock market goes up and down over time, but the long-term trend is up.  When there's a rally under way, everyone feels like a genius.  When the market hits an air pocket, though, with few exception...

Sound Advice: June 17, 2020

Rock and a Hard Place Regardless of your age, impressions from childhood linger.  As the first days of summer approach, we all remember the feeling that accompanied the end of a school year.  Yet as much as many of us would like to believe we again have the summertime freedom to do as we wish, the reality is quite the opposite. Although months of confinement and limitations on social interaction have increased our personal discomfort and severely impacted the business community, our current situation is not analogous to the end of any school year.  It’s quite the opposite. There is every reason to continue wearing face masks, social distancing, and avoiding close contact with others.  Nothing suggests that we can modify our behavior significantly or resume patterns of daily living we enjoyed only a few months ago. There are no meaningful advances in medical treatments.  At best, there are attempts to combine different approaches...