A 2016 report from the Centers for Disease Control and Prevention (CDC) found that 20 percent of Medicare participants 65 or older don’t take their blood pressure medicine as directed.1 Additionally, 20-30 percent of prescriptions for chronic health conditions are never filled and roughly 50 percent are not taken as recommended.1
Healthcare professionals can be spot on with diagnosis and prescription, but if the patient does not implement the advice it can be all for nothing. There are many parallels to the work we do as financial planning professionals. Studies by Vanguard3 and Morningstar4 have shown that behavioral management is one of the biggest values that we provide for our clients. We may have some complex tax strategy or an airtight plan for how to get to retirement, but if our clients don’t change their behaviors none of it matters.
People often think salary and savings are the biggest variable to building wealth, but I would argue that it is actually spending. The cliché advice is to “spend less than you make and save more than you think you need to.” I imagine these conversations with clients are similar to when you might tell you patient that they need to exercise regularly or eat healthy. It’s not complicated, but it is hard.
Long-term changes in how much you spend can have huge ramifications on your ability to plan for financial goals. It is one of the only things you actually have control over in the financial planning process. And how much you need to save is directly related to how much you spend. The higher your standard of living, the more money you will need to save to retire.
The traditional thought is that budgets help you keep your spending in check. This is partly true. Budgeting can provide structure, consistency, and accountability with how you spend money. I emphasize “can” because far too often people create budgets, but fail to stick with them. Often, this is because budgets that are overly optimistic don’t necessarily help change behaviors. More important than developing a budget is developing a way to systematize spending that will develop good habits. We’ll call this a spending plan.
Spending Plan vs. Budget
What is a spending plan and how is it different than a budget? I describe a spending plan as giving every dollar a job and making sure it’s doing that job each month/pay period. To do this, I find it helpful to use a “three buckets” mentality. Think about categorizing each dollar into either “past obligations”, “current expenses”, or “future goals.” Past obligations are your fixed, reoccurring expenses. Future goals are things that you want to do or need to do someday. This means saving for retirement or college or that dream vacation. Current expenses are your variable expenses that can differ on a weekly basis. These are things like groceries, gas, home depot trips, eating out, etc.
The key to establishing a spending plan is to automate transfers and thereby limit your control over spending decisions. As counterintuitive as it might sound, limiting the control you have over spending decisions will keep your spending on track. So how do we accomplish this? With multiple checking accounts, savings accounts, and automatic transfers. Here’s how:
Step 1: Create a checking account that all money flows into. This is where your paychecks should be deposited. We’ll call this the Bills Account. All of your “past obligations” will be paid from here. Set up automatic drafts for these bills to come out of this account on a monthly basis (or whatever frequency is required). Don’t carry a debit card for this account as you should not be spending from here.
Step 2: Create a savings account for each of your “future goals.” This would be things like that trip to Europe. It could also be to build an emergency fund. Again, you want to set up automatic transfers to go into these accounts on a regular basis. Most of the time people try to save whatever is left over, but we want you to be disciplined about setting aside money for these goals.
Step 3: Create a checking account for all your weekly variable spending. We’ll call this your Spending Account. This should be the money that is left over in your paycheck after your fixed expenses and savings amounts. You should set up a monthly/twice monthly/weekly transfer from the Bills account to the Spending account. Since this amount varies from month to month, it may take a few months to get this amount right. This is the only account you should carry a debit card for.
One of the reasons that this system works is because it helps break down your paycheck into smaller portions that are easier to manage. If you are a two-income household and get paid once a month, you may have A LOT of cash hit your account at once. The temptation when we see those big numbers is to not worry as much about spending extra on a trip to Target or date night because it doesn’t seem like a big a deal. But in reality, much of your income is already spoken for (or in the case of savings, should be spoken for). Paying yourself a spending allowance helps keep spending in check because that amount is likely a much smaller number than your total pay.
As health care providers, you know that human behavior accounts for close to 40% of the risk associated with premature, preventable deaths–like heart disease, cancer, and stroke–in the United States.5 In the financial planning world, spending is more closely associated with financial success in your life than any other factor.
Bridgeworth, LLC is a registered investment adviser.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional.
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