by Alison Rich
It's that time of year again when we toss around well-intentioned (but not oft-followed) declarations about culling junk food from menus, eating a nutrient-dense diet and going to the gym. But our fiscal fitness is just as critical as our physical, especially in today's tough economic times. That said, just as cutting back on calories and bumping up our burpees may be easier said than done, so too - it seems - is living within our means.
As such, we thought it apropos to earmark several pages for a finance-focused feature in this, our inaugural issue of 2013. So we contacted a few financial planners, who graciously shared their expert suggestions on living within your means. To up the editorial currency even more, we also chatted with a trio of local folks, who were kind enough to impart their personal tales of financial tribulations and triumph.
While each of our interviewees offered his or her own unique take on the topic, all of them echoed a few key tenets, including this one: Living within your means isn't just a good idea. It's a must.
Conquering the "B-Word"
Unhappily, the primary part of living within our means isn't something many of us like. What it all boils down to, our planning professionals agree, is the hackles-raising - and frequently maligned - B-word: budget.
"It's a six-letter four-letter word," said David Diesslin, CFP, of Diesslin & Associates. "But if you figure out how much you can save and know what your net worth is and where you want it to be in a year, then the rest is history. If you put intent and energy into improving your financial health, it will happen. Not in a linear sense, but it will happen over time."
"The connotation [of doing a budget] is that you don't know how to manage your money or can't live within your means," said Kim Dignum, CFP, of Dignum Financial Partners. "But it's just the opposite: You are managing your money and are making it so you can afford your lifestyle if you create a budget."
The process, she says, is as simple as inking everything you spend and tracking it vigilantly.
"I recommend sitting down at the end of the month and really looking at what you spent. Were you off? Was it realistic?" Dignum said. "You have to be aware of where your money is going. … I tell people to go through the last six months of their spending. You will get a good average of where your money is going."
So long as your current budgetary numbers are tethered to your future objectives (i.e., college funds, vacation fund, retirement savings), you're on target, says Mike Mills, CFP, CLU, CFS, of Mike Mills Wealth Management.
"The ultimate goal is to have your budget equally tied into your financial planning and the long-term goals you've set for yourself, balancing liquidity and spending," he said. "You need to be in a cash flow-positive scenario at all times.
Admittedly, it can feel like walking a tightrope in stilettos.
"If you're saving money in your 401(k) but your credit card is getting bigger every month, that's not a good long-term plan; there's got to be balance," Mills noted.
Besides the popular Quicken software that many employ for their home accounting, several of our experts point to mint.com and mvelopes.com as easy, cost-free budget-makers. If those aren't your cup of tea, no worries; the Internet is rife with options. A simple search for "budgeting software" will pull up tons of choices.
Do your research and find the one that meshes with your needs and comfort zone, our pro panel says, or you'll likely lose interest.
"Budgeting isn't difficult. It's sticking with it and tracking it that require work, and most people don't like doing it, so they abandon it," said Wes Roland, CPA, of RKM Financial Services. "If the system is too complicated, you'll have a propensity to ignore it and not do it. So find something that works for you."
Although setup can be time-consuming, if not a bit tedious, the time spent will be well worth the effort, our specialists say.
"Be patient," said Dan Mauck, CFP, senior financial advisor at Clintsman Financial Planning. "This process takes some time and tweaking to find the right balance overall, but living within your means is where discipline is gainfully employed and instant gratification is on a short leash, not the other way around."
Re-Entering the Nest
It's equal measures of patience and persistence that are pointing Mike Fielding back to the black. About 10 years ago, the Fort Worthian and his wife were living in a house valued at 2.5 times their combined salaries. "We were doing OK, but it was sucking away our income," he recalled. The flash point was the couple's 2008 divorce, which left Fielding in dire financial straits. On the hook for $100,000 in student loans and up-to-the-eyeball credit card debt, the masters in divinity grad (and, now, sole breadwinner) decided it was time to dig in his heels - and dig himself out of his monetary rut. Fielding's solution: In December 2011, he moved back with his parents while shoring up his balance sheets and returning to solid financial ground.
"Some people may view it negatively and not see it as living up to the "American dream,"" said Fielding, minister at Arlington Heights Christian Church, of his choice to bunk with Mom and Dad. "There is still that stigma, but it's been a positive reaction from family and friends … as long as they know I'm working toward my plan."
His take-control M.O. is simple: deep-six his debt and - over time - save enough money to purchase a piece of land on which to build a house. Fielding also took a part-time post with a computer networking company to augment his coffers. Additionally, he's jettisoned his several credit cards, whittling his wallet to a single piece of plastic, which he pays off at month's end. And instead of squandering his disposable income, Fielding uses it to pay bills or to pay himself - i.e., sending it straight to savings.
Although his solution is going gangbusters - "My parents would be happy if I never left again, which I find odd," Fielding chuckled - it's not without its share of stresses, he says.
"I thought when you hit 18, you were out. So that's been something I've struggled with - and still do," Fielding said. "My life isn't bad - it's just not what I expected."
Proactive Attack
Inasmuch as we aim to foretell it, the future, of course, is never crystal clear, which makes planning that much more challenging. But while expecting the unexpected is, by all accounts, a part of life, our pros also concur that the key to financial health - and even ultimate wealth - is within our control.
"From a financial planner's perspective, living within one's means is more than making the cash flow stretch to the end of the month. It also means fundamentally having the bases covered: risk management, dedicated fundings for the future, insurance," said Guy Cumbie, CFP, of Cumbie Advisory Services. "It's being proactive about creating your future and trying to shape it rather than just moving aimlessly along, hoping it will result in something you'll like."
When Ralph Lahoud saw the writing on the monetary wall, instead of waiting for things to miraculously turn around, he "attacked" the situation, he says.
Stopped short by a 2001 back surgery that precluded him from strenuous physical activity, Lahoud was forced to take a two-year hiatus from his self-owned construction and remodeling business. That decision cost the Fort Worth resident his business (he worked solo) and, because he was the sole breadwinner at the time, fully upended his family's lifestyle.
To make ends meet, he bought and sold items on eBay and other online auction sites. Because Lahoud was confined to bed for four months, wife Amy drove to garage sales, picking up items for her husband to sell, with their two small children in tow. "I barely made enough to pay the bills," Lahoud said. They sold their home - downsizing from 2,000 square feet to 900 - severely cut back on "luxury items" like cable TV and restaurant meals and immediately stopped using credit cards. "We had to restructure ourselves and make a lot of sacrifices just to survive. It was tough," he said.
Finally, in 2003, with just $500 in savings, Lahoud was well enough to launch a new business, Davinci's Design & Remodel, which today is going great guns. "I had to rebuild my whole life from zero," he recalled. Although things are much brighter today, Lahoud still holds fast to the budgetary discipline he initiated during the down years. He and Amy rarely use credit cards and, when they do, pay off the balance at month's end. He channels a certain percentage of their money into "buckets," each account earmarked for a different purpose, and is a huge proponent of investing. His rental properties and Amy's full-time teaching job also supplement their income.
Beyond that, the Lahouds live lean and mean, with prudence their guiding principle. "You never know when you're going to fall on your face," Ralph said. "All it takes is one accident and - boom - you lose everything. … It was a wakeup call for me."
Mending the Spending
Besides the fear and loathing that budget matters engender, our profligate spending habits don't do us any favors either. We fritter away funds cavalierly - even recklessly - temporarily forgetting the fact that the bills always find their way to our inboxes.
While you might assume our experts are opposed to plastic, that's not necessarily the case.
"I don't have a problem with credit cards - if you pay them off each month," Roland said. "It's riding a balance over and over that gets expensive."
Michael Dallas, CFP, of Michael Dallas Wealth Management, subscribes to that sentiment. "You can get the same convenience with a debit card that you can with a credit card," he said. "But if you're disciplined and can pay off your credit card every month, then get a card with benefits."
Unless you routinely have large spending - i.e., run a business - and can float the annual fee for an airline-miles card (not to mention the additional airline ticketing fee), Dallas recommends cash-back cards. But check the annual fee and make sure it's zero, he cautions. And another heads up: If you're considering skipping a payment just this once, don't, Dallas warns. "You'll get charged the interest for the previous month and for the next month," he said.
As for Lahoud, when life's temptations crop up, it's easy to resist grabbing the Visa or draining the savings, he said: "I just turn back time and ask myself, "Do I want to go through all that again? Do I want to put my family through all of that again?" And my answer is always, "Absolutely not." "
Pay Yourself First Sounds good, right? But if you've got extra coins in your budget, the idea isn't to go hog wild and launch into a spending spree. Paying yourself first means preemptively siphoning those funds straight into savings.
"The key isn't to do it backward and see how much you have left over at the end of the month," Mills said. "If there is money left over in your budget, have ACH [Automated Clearing House] take it out automatically and immediately, before you even see it. You want to be proactive with taking that money out, not reactive."
Mauck agrees that eliminating the temptation on the front end is imperative to living within your means.
"After you have a reasonable spending plan in place, set up an autodraft for a small amount - small enough so that you barely notice the money has moved from your main bank checking account to another account (like bank savings or brokerage), then ratchet up the dollar amount every several months until you feel the financial pinch each month," he said. "As your recurring income rises (like when you get a raise or promotion), increase the amount until it pinches again; as you acclimate, it will become second nature to live only on what's available in the checking account."
But creating that pay-yourself mindset doesn't happen overnight, and habits are hard to change. Cumbie, for example, uses cash-flow planning with clients to help them live within their means. If tracking inflows and outflows isn't enough to generate a clear awareness, then replacing that old habit with a new, restructured one is the next option, he says.
"Just saying to people, "Hey look at this cash-flow statement. There's red [ink] and excessive outflows to rein in," very commonly doesn't change the habits. My experience of 30 years has been that there are a lot of cases in which awareness-building is insufficient to address the issue of cash-flow problems," Cumbie said. "So rather than trying to change the habit with elevated consciousness, we essentially structure in a new habit, which is funneling money to certain places before it leaks out to the extras and unaccounted-for items [in the budget]."
Deceptively Difficult
Distilled to its basic elements, living within your means is a pretty simple concept. So why do so many folks struggle with it?
"Because it's hard to make choices, and so many of the choices you want to make are more pleasurable," said Jeff Moore, finance instructor at TCU. "And there's always a tradeoff. If you save, that keeps you from having money to spend. And if you spend, that's money you don't save. Not everybody has the ability to make those decisions. … It's not easy. Whatever choice you make, you're affecting something else."
"Denial is one part of it," Dignum offered. "Keeping up with the Joneses is a big part. People want and they don't start with their needs; they start with their wants. And the needs are the boring things, not the fun things."
There's no question the inability to defer gratification gets people into hot water, our experts also opine. But more than that, living beyond our means is a cultural myth, Cumbie suggests, in which people grow up accustomed to a certain lifestyle … and assume it will continue unabated.
"People think that life comes with houses, cars, college tuition and co-signed loans," Cumbie said. "But [in reality] when you leave the nest, it's up to you. To think there's no "interruption of service" is probably just naïve."
Veiled behind that naiveté, however, may be a simple lack of financial edification.
"We teach people how to be good doctors, lawyers, teachers, journalists," Moore said. "But we don't teach them how to manage their personal finances."
While most won't argue that firming up our fiscal acumen is a smart move, there's no question it's difficult. But every now and then, you meet someone for whom it just seems to come naturally.
Like Chris Ford. The local software engineer and his wife, Terri, a school nurse, started paving their financial path straight out of college. "We realized that to prepare for the future, we needed to have a plan and not do things haphazardly," Ford said. "We saw many friends and relatives living paycheck to paycheck and didn't want to be in that position."
From the get-go, the couple agreed to practice delayed gratification, always saving for purchases rather than buying on credit. "It was important for us to be on the same page about where we needed to be further down the road," Ford said.
Pretty soon, those healthy habits became their bedrock. Now married for 24 years and parents to three kids - 11, 13 and 15 - their financial practices essentially are on autopilot.
"We are past the point of following a rigid set of rules," he said. "Adopting those principles and making them part of our lifestyle makes it easier to live within our means."
Save for their mortgage, the couple is debt-free, and if they continue living smart - aka, within their means - their house will be paid off in two years.
"That will allow us to move on to the next phase of our lives - college and retirement - in a nice financial position," he said.
Besides helping to nicely feather their nest egg, the Fords" penny-wise ways have resulted in a serendipitous revelation, Chris says.
"We've found that giving and being charitable is also important. So we tithe and give to other organizations, which allow us to put our finances as a whole into perspective," he said. "It's not just about what we accumulate - it's what we do with what we accumulate that's equally as important."
