Thoughts On Money
Why did I decided to start writing a blog? Well, over the years I have been asked a lot of the same financial questions from friends, family, and clients. Thoughts On Money is the home for the answers to these common questions and a perspective on money I hope you will find informative. This blog is meant to be a place where readers from every level of financial literacy can find insights into the inner workings of finance, my chosen vocation. Know that while many questions won’t have a one-size-fits-all solution, the principles behind each topic apply universally to everyone. My hope is that you find yourself little bit smarter and feel more empowered to address any financial curveball that’s thrown your way. Trevor Cummings
I was recently invited to speak on a panel about personal finance. The moderator went through a handful of your typical questions on budgeting, investing, and general perspectives on money. While I really enjoyed participating in the event, the final question almost stumped me:
“What is the number one mistake you see people make with their finances?”
Mistakes come in all different shapes and sizes, so how could I possibly narrow this down to a quick response. Nonetheless, there I was on stage expected to provide an answer. I opted to sidestep the question with a personal experience.
I transitioned into a story about my experiences when I worked in the fitness industry. The most common aspiration for a new gym member was to lose weight. A lot of people came through those doors and some achieved great success, while others struggled to reach their goals. Over hundreds of new members, I noticed that the successful ones had a common trait – they were keenly aware of something the others weren’t.
They knew how many calories they burned each day, how many calories they ate, and what a second serving or that dessert would mean to their goals. Awareness was the key to their success.
Is self-awareness something people are born with? Perhaps, but this wasn’t often the case for the success stories I mentioned. These people also used available tools such as mobile technologies to help keep them on track and motivated, all the while building up their awareness “muscle.”
Those who were unsuccessful also had a common trait. On day one we would ask someone to estimate how many calories they ate and burned each day. We would explain that a pound of fat is equal to an intake of about 3,500 calories and that in order to shed that single pound they would need to burn more calories than that 3,500 to do so. We even kept an ugly, heavy and gelatinous blob to illustrate the look and feel of that pound of fat. As you would probably assume, on day one people often underestimated their intake and overestimated their output. After a week of food journaling and some general education, they started to understand the true realities and started to become more aware.
I’ve created hundreds of financial plans for clients of all different backgrounds and I am sure you could guess that the same lack of awareness amongst my fitness-seeking friends was prevalent in people’s finances as well. I am a bit of a neurotic budgeter myself, as my wife could attest to. If you were to ask me how much our family spent on food in March of 2015 I embarrassingly may be able to answer that question. While I know this isn’t the norm, it’s clear that most people are fairly disconnected from their spending.
This lack of financial awareness really began to reveal itself when I created more elaborate financial plans. I would collect a copy of a tax return to make sure I had accurate income numbers, then I would input all the costs and savings allocations. I would double check all my work to make sure I put in the taxes accurately, the 401(k) contributions, 529 savings, mortgage payments, property taxes, etc. The last number needed to produce the cash flow statement would be the clients general living expenses. I understood that these expenses aren’t always linear, as sometimes spending can be lumpy. You may have to fix a car in June and some extra spending for gifts in December, but I figured it would all equal out if I was able to get an approximation of monthly spending.
Here is what would happen on a majority of these plans: During my meeting with Mr. Smith, who makes $300,000 a year, he would estimate his living expenses as $6,000 a month ($72,000/yr). Yearly, he contributes $18,000 into his 401(k) and pays $100,000 in taxes.
So, let’s review: $300,000 of income less $18K(savings), $100K(tax), $72K (living) pencils out to a SURPLUS of $100,000, right? Not in most cases, I’ve seen. It’s much more likely that Mr. Smith would say, “I have no such surplus!” If I never asked about this mysterious extra $100,000, the plan would logically assume this number as money put into savings. After all, wasn’t I made aware of all the “living” expenses?
Just like we tend to underestimate how many calories we eat, we also underestimate our spending. When we dig a little deeper, we typically find that people tend to spend everything they make. Furthermore, as their income increases, so do their expenses. A phenomenon is known as “lifestyle creep.”
This is a lot of bad news, right?
So, what does one do now? Well, I have great news for you! – there is a TON of finance technology available to help you build awareness. Our group uses software that helps to produce very helpful reports and easy to use spending logs. The engagement of these and other tools has been a common thread among the financially successful.
Do these tools have magical powers? Well, sort of. To the degree they can magically get us to change our behavior can make them powerful.
This means that you have power, literally at the end of your fingertips. Think about the millions of Apple watch and Fitbit owners around the world that are taking a few extra walks around the block each day to make sure they “close their rings” (apple watch lingo) or check off their goal for the day. Habits are built through little efforts each day that help us to take one step closer to our goals. Awareness is one attribute that helps us to modify our behavior when we get off track. Take a look at these ways to get financially “fit.”
- Test your own awareness – take a guess on how much you spent in 2017. Write it down.
- Pull an end of year bank statement (you may need to pull a few if you have multiple accounts) and write down what your actual total spending was.
- Did you underestimate or overestimate? By how much? By what percentage?
- Get set up on an account aggregation tool* today and itemize your expenses for the next three months. You will be surprised at how your newfound awareness may start to change your spending habits 😊
* Feel free to reach out for help with the many tools that are available out there and a few additional expense tracking tips!
Private Wealth Advisor
Trevor Cummings is a Private Wealth Advisor in The Bahnsen Group, a wealth management practice with offices in Newport Beach, California and New York City. He is a Certified Financial Planner® and author of the ThoughtsOnMoney.com blog.
The Bahnsen Group
The Bahnsen Group is registered with HighTower Securities, LLC, member FINRA and SIPC, and with HighTower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through HighTower Securities, LLC; advisory services are offered through HighTower Advisors, LLC.
This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.
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This document was created for informational purposes only; the opinions expressed are solely those of the team and do not represent those of HighTower Advisors, LLC, or any of its affiliates.
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