One of the great things about working with an Aptus planner is that they don’t exist in a silo! All of our planners continuously work to stay up-to-date on a wide range of topics and collaborate on the best advice to give our clients.
April’s topic is a doozy: addressing savings rates through cutting spending. Particularly, how do you help clients adjust their spending/lifestyle, which is probably pretty ingrained, in order to help them reach their financial goals?
The first step, always, is to identify whether spending cuts need to be short-term or long-term.
A spending gap is a state where the amount being spent in a month exceeds the amount available to spend after factoring in long-term savings, taxes, and benefits.
With a short-term spending gap, the question becomes basic math: “What’s the most efficient and financially savvy way to cover the gap?” Maybe it’s with savings or other short-term spending cuts.
What are some examples of short-term spending problems?
- Taking time to do more training for a higher pay raise in the future
- Taking extended maternity leave or a sabbatical
- Moving across the country to start a new role and taking a few weeks/months to transition your household
- Adding in expenses like childcare, student loans, and practice buy-ins. These are all examples of payments that are finite, but while in the thick of things, it can be really hard to see the light at the end of the tunnel.
Long-term spending gaps that impact savings rates need more conscious decision-making. We typically classify these as decisions that will affect a client’s overall wealth and ability to retire on their own terms one day. Maybe larger cuts or decisions are required to avoid a chronic savings gap. Ultimately, that gap could result in retiring much later than expected, reducing lifestyle in retirement, and being limited in options in the years ahead. The planning model we use at Aptus is critical in this process. Clients have the opportunity to engage in iterative scenario analysis. What if we made lifestyle cuts? What if we downsized our home? What if we downsized that car? What if we moved to a different city, even?
Solving a spending gap before it becomes a problem is not available to everyone, but it’s the most ideal. That’s why we recommend that most early-career physicians get a financial plan. They may not realize that they are creating a future long-term spending problem when they want to buy a $1 million house, plus buy into their practice, pay off student loans, and fund college educations for their children all at the same.
Common expenses that prevent clients from hitting savings goals are:
- Too much house - either a home that is too expensive for your income or a home that requires significant maintenance costs (the same is true for vacation homes!)
- Lifestyle choices, like expensive cars, luxury vacations, or private school for family members
- Not factoring in increasing expenses, most notably for our physician households, student loan payments that increase with income, or the rising costs of kids as they age.
- Late starter tax: A person who starts saving for retirement later in life has to save much more than the person who started saving in their 20’s. This often forces tough lifestyle decisions in our 50’s and 60’s.
Financial planning helps to create transparency in numbers - it allows clients to take the feelings out of the problem and look at the black and white (or sometimes red) math. True cash flow planners can identify facts (when the shortfall will occur, why it is happening) and offer strategies to solve the problem. Recently, we had a client let us know that the simple act of looking at spending and making choices based off their actual priorities had helped them to leave toxic jobs and create an emergency fund for the first time. That’s real progress and freedom. Another client saw that by buying a less expensive house, they would be able to realize their dream of buying into their practice without a pinch on their finances.
Setting a lifestyle to save enough for the future is pretty easy from the beginning, since our brains aren’t yet adapted to a lifestyle. But pulling back on a lifestyle to achieve a desired savings rate is pretty difficult. Our brains aren’t wired to want to downgrade on luxuries. But when our clients see the math, they get to make decisions based on facts vs. feelings. Seeing the long-term impact from the balance between spending and saving gives clients the chance to clarify what they truly value and build a savings plan to achieve it, and align their lifestyle around that savings rate.
Do you have a spending gap that you want to close so that you can achieve an ideal savings rate? A financial planning process might be just what you need to get the math and the confidence to get to the savings rate you deserve to build the life of your dreams.