A strong financial plan incorporates many elements. A good financial advisor will analyze your entire financial situation, from insurance policies to income tax returns, to help you achieve financial independence. Yet one of the most glossed-over steps in financial planning by both advisors and clients is probably the most crucial: budgeting. Without a good budgeting strategy, your financial plan will be destined to fail. A good financial advisor should help dictate an appropriate budget for your situation, but following the budget is ultimately your responsibility.
How Your Advisor Can Help: Setting Your Budget
Your financial advisor should help you through a step-by-step process to figure out a budget that’s right for you. Make sure that your advisor helps you do the following:
- Make a detailed list of your expenses. A common reason financial plans fail is that people often underestimate how much they spend on a monthly basis. Your advisor should encourage you to detail your expenses by looking at your bank account and credit card transactions each month. A wealth management website (like the one NewFocus Financial Group uses for its clients) is helpful in automating this.
- Figure out how much you need to save. Your advisor should analyze how much you need to save each month in order to reach your retirement goal, taking into account your desired retirement age, projected retirement expenses and current portfolio. The resulting number will be used to calculate your monthly budget.
- Trim your budget. Once an appropriate monthly budget is calculated, your advisor should help you figure out how to get your monthly spending within its limits. Your expenses will be divided into two categories: basic and discretionary. Basic expenses are mandatory and include categories like rent, utilities and groceries. Discretionary expenses are those you should be able to cut back on, such as non-mandatory purchases, dining out and vacations. Your advisor should work with you to see which discretionary expenses you can cut down on, or cut out altogether.
Cutting cable could save you more than $800 a year.
Sticking to It: Simple Saving Techniques
Once your advisor creates your budget, following it will be up to you. This, of course, is the hardest part. The most common categories in which NewFocus Financial Group sees people overspending are entertainment, shopping and dining out. Here are some simple tips that can get you started on saving in these categories:
- Cut your cable. The average cable cost in 2011 was $78 per month, up from $40 in 2001. Often, people pay for cable out of habit, or for having the option to watch 200 channels more than actually watching them. Turning off your cable and investing in Netflix or Hulu Plus (each $7.99 a month), and using an antenna for local channels, can keep you entertained for hours at a much cheaper price. (Potential savings: $840/year).
- Eat leftovers for lunch. It sounds like common sense, but you would be surprised how many people throw away their leftovers. The average American throws out 25% of the food they purchase. Help the environment, and your wallet, by eating your leftovers for lunch the next day at work, instead of that $7 sandwich. (Potential savings: $1,750/year).
- Get back to nature. Taking a family of four on a Saturday hike instead of to the movies can save you an estimated $40 a week, and it will have the bonus of getting everyone in shape. Furthermore, ditching your gym membership in favor of running/walking outside will get you breathing more fresh air, and it can save you an average of $55 a month. Don’t want to give up your exercise classes? Check out the free ones at fitness stores like Lululemon and Sports Basement. (Potential savings: $2,740/year).
- Shop smart. Remember when your grandma used to clip coupons? She was smart. If you aren’t a fan of coupon clipping and you shop online, you can use Ebates.com, a website that will link you to almost any online retailer and send you up to 10% cash back when you shop. For example, stocking up on staples like toilet paper, toothpaste and shampoo will get you 4% cash back at Drugstore.com; this is on top of the 1–5% cash back you should be getting from charging your purchase on your cash back credit card (which you should always be paying off in full every month). Download the Ebates toolbar to your browser and you’ll never forget to save. (Potential savings: $540/year)
With these tips alone, you could be saving $5,870 per year, which is enough to fund your maximum traditional or Roth IRA contribution for the year (assuming $5,500 in 2013, with no catch-up).
Take the Budget Challenge
Budgeting is simple in theory, but it can end up being the biggest challenge in your financial plan. Your financial advisor can help you set your goals and your budget, but at the end of the day it will be your job to follow through.