Managing your expenses during uncertain times

Many of us have never experienced turbulent times like the ones we’re living through right now. And it can feel as if a lot is out of your control. If you’re feeling stressed about your finances, reviewing your expenses is one way to manage that stress and take control.

Working with clients and preparing hundreds of financial plans over the years, I’ve learned that “spending” is the one word that can wreak havoc on any financial plan. Markets go up, go down and up again, but our expenses typically stay locked in place. It’s easy to overlook how a cable/internet/phone bundle of $200 a month can add up to $24,000 over 10 years. And that’s not including the missed opportunity cost of having invested that money instead.

The long-term impact of knowing your spending decisions

Am I saying that you need to cut spending? Of course not. My job is to guide my clients through the facts and emotions, and advise them to make the best decisions for themselves. I cannot tell you that there is a one-size-fits-all solution or that one expense is better than another, there isn’t a rule i.e., spend only x% of income that fits all clients. However, I haven’t done my job if you are not aware of the long-term impact of your spending decisions.

For example, let’s say before the pandemic you used to eat out quite a bit. Now, maybe you’re ordering a lot of takeout. Start tracking how much money you’re spending. Then you’ll have a better understanding of where your money is going, and if necessary, you can review your spending to make sure it’s aligned to your budget. Maybe it makes sense to cook more instead or cut down the number of times you order out. You’ll start to have visibility on your spending once you start tracking your expenses.

Managing your expenses isn’t just about cutting and paring down. Another overlooked benefit is identifying areas where you’re spending less than you’d like. When my wife and I had our first child, we were both stressed. We felt the weight of working full-time while taking turns with our new baby and missing lots of sleep. Each year we review our expenses and the year our child was born, we noticed that we spent less than $700 toward a vacation (a financial goal we allot money towards in our plan). This knowledge led us to book a much-needed summer vacation.

Clearly, no one is traveling anywhere right now, but eventually we’ll get back to flying and taking vacations. Saving up for a vacation is a valid financial goal that comes from reviewing your cash flow and understanding what’s important for you. As for me and my wife, our annual audit of our expenses let us know where we were spending our money and allowed us to have a bigger conversation about how we wanted to spend it.

The power of knowing your spending patterns

The lesson in reviewing and managing your expenses is not to teach you to spend less or be ashamed of your spending. In fact, it’s the opposite; the more you know how and where you spend your money, the more conscious you become about your money choices, and the higher your chances of learning what’s important to you.

For example, let’s look at Jane and John. Jane and John are the same age, and both have just recently retired. Jane has $750,000 in retirement assets (in retirement accounts, taxable investment accounts, etc.) and $100,000 in checking, savings, and cash deposits. She’ll receive $30,000 from Social Security. She also owns a home valued at $250,000 with no mortgage payments remaining, bringing her total net assets to $1.1 million.

John has $2 million in retirement assets, $10,000 in checking and savings, and a $1 million home with an $810,000 mortgage balance. John also will receive $30,000 in Social Security benefits. This brings John’s total net assets to $2.2 million.

The question is “Who has more economic freedom?” Jane or John? It depends. However, I can assure you that the more specific answer is expenses. Let’s say Jane only needs $40,000 a year for living expenses so she will only need to draw $10,000 a year from her retirement assets since Social Security covers the rest. That means Jane would presumably never outlive her assets. In contrast, if John needs $300,000 annually to cover living expenses, it’s likely that he’s at risk of outliving his assets and he will need to rethink his spending plan.

This might sound like an extreme example, yet it happens every day. If you want to live life to the fullest, you’re more likely to do it if you’re conscious of how you spend your money. If the money we earn represents pieces of our lifetime that we can never get back, shouldn’t we be conscious about where and how we spend it? And the only way to spend consciously is to actually know on what and where you spend your money.

Getting a handle on your expenses

Now is a great time to start tracking your expenses. With many of us sheltering at home, it’s likely that we have a little more time on our hands. Here are some tools you can use to begin.

• Mercer Advisors financial planning portal. If you’re a Mercer Advisors client, you already have access to this tool (eMoney). It allows you to track your expenses and you can also link your checking account or credit card to track your expenses automatically. You have complete control over how much information you share with your advisor (from every transaction, to a limited view of the types of spending categories, to none).
• Quicken is another popular personal finance management tool. Quicken lets you be very granular and offers lots of functions, which can make it a bit more cumbersome. If you’re into analyzing your data, Quicken might be a good fit. However, if you take no pleasure from creating a 12-month profit & loss statement for your family’s finances (like I do) then it might not be the right option.
• Mint is a free, web-based tool that’s similar to our financial planning tool. It lets you link your accounts in the same way to track your expenses and is fairly easy to use. Of course, it’s good to keep in mind that with any free services you use, your data is the product, and it is being commoditized to allow companies to understand your buying habits.
• Create your own tracking tool. I have some clients who use the low-tech but very effective method of reviewing their checking account and credit card transactions every month, inserting them into a spreadsheet, and comparing them to their projected budget.

Get started today

There’s no one way to track your spending. The most important thing is that you get started. If you’re a Mercer Advisors client, your advisor is your biggest advocate and we encourage you to talk to them about how to get set up on the financial planning portal, if you’re not already connected.