When I meet someone new and tell them what I do, a common response is,“I’ve made a lot of mistakes, so I’m not a candidate for financial planning.” Their “mistakes,” often fall into three categories: spending too much, saving too little, or investing with a broker (though they often don’t realize this last one until they talk to me further). Obviously, these people are the perfect candidates for financial planning because they need the hope to see a better tomorrow, the discipline to get there, and to confront the numbers head on (often it’s not as bad as they think). I want to discuss the fixes for these three categories of mistakes to put people at ease. There is hope and you deserve to be at peace with your finances.
1. Spending Too Much
With each of these categories, the first step is to face the numbers. Make this very simple for yourself and using a pen/paper or computer sit down and record your monthly expenses (mortgage/rent, utilities, etc.). However, that won’t help if your spending is related to your discretionary funds. Some banks and credit cards will break down your bank account online into your spending categories. If yours does not do that, you should do what my wife did: Take a monthly statement, sit down, and add it up by hand. Separate your spending into: clothing, eating out, entertainment, groceries, etc. (add your own as well). This exercise takes about a half hour. If you do it for a couple months you will start to see where you’re vices are and where you can cut back. At this point, your next step is to decide that in each of those categories you will only spend X amount of dollars. Many people have success putting that amount of cash in an envelope (one for each category) and stopping when it’s gone.
2. Saving Too Little
The commitment to saving is difficult. The rewards are so far away, that you are tempted to spend the money you could be saving on immediate needs. Many people say, “Well, I have kids and can’t cut back.” My wife and I understand all too well the temptation to give your children the best. However, making choices to not eat out and put that money in a bank account each month will add up (even with $25 a month). The best way to fix this is to set a goal and enroll the family in the goal. If you know that you need $10k to buy a car for your oldest child in a couple years, divide that out by the number of months you have until that time and start socking money away. Placing this money in a high yield savings account is a great way to watch it grow. Being transparent about it’s growth will provide an incredible example for your children as well.
3. Investing with a Broker
For each of my clients, I provide a fiduciary oath. You’ll know a broker when you talk to one, because they can’t say this – their firm’s compliance department doesn’t want them to take on the “liability” of promising to always act in your best interest. You’ll also know if you’re working with a broker because they often talk mostly about gains, and less about the downside of the funds you’re in. Typically, this is because they don’t have other funds to sell you and don’t want you to go somewhere else. They may also not have the knowledge base to steer their clients in the right direction. Bad investments often happen to good people when they work with a family member or friend who is a broker because they want to help them out, often at their own detriment. So, how do you fix this? Make the decision to put yourself first and talk to a fee-only investment advisor. Don’t operate on blind faith where your financial decisions are concerned.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.