spending and saving – Memphis Flyer

There are many well-documented systems to budget and pay down debt. If common approaches don’t resonate with you, here are a few tips that might be helpful when coming up with a plan for you.

Paying bills, paying off your credit card each month, and keeping your bank accounts in the black are necessary but not sufficient to properly manage your finances as your income rises. A sense of abundance is usually good, but most people need a slight sense of scarcity in their personal accounts to effectively manage spending. Consider keeping a checking account as your “operating account” with a balance low enough that you have to at least momentarily consider each purchase.

To create abundance, consider green-lighting certain spending guilt-free. Examples include a healthier lunch spot you like, unavoidable bills like utilities, and consumables like household staples, toiletries, or makeup that you actually have used up. Some families find that rather than attacking their grocery budget, green-lighting grocery store spending itself can be helpful compared to expensive dining out, takeout, and delivery.

Manage your credit cards. Studies have shown that you spend more with credit cards compared to non-credit alternatives even if you pay off your cards each month. Try it for yourself — use a debit card with a balance low enough that you have to pay attention for a month and see how much less you spend.

No-spend periods are an interesting way to reset your spending mindset. When I ran my transactions for last year there was only one day without a card swipe or online charge — December 25th. Can you go a day, a week, or a month with no discretionary spending? You can easily find online groups attempting to make it a year or more. While they seem extreme, even a brief no-spend can be a good way to reset your mindset.

Closets can easily get out of control. Try moving things to one side of the closet or front of the drawer after each wear. In a few months you’ll clearly see what gets worn and what doesn’t. Do a purge to a reasonable wardrobe footprint with items you actually use and then consider a net-zero approach — old clothes have to go for each new clothing item brought in. Consider a no-buy period for clothes if the size of the wardrobe is an issue for you.

Amazon allows you to see all purchases since 1995. Look back to when you started using Amazon in earnest and scroll through the purchases from years ago. How much of the stuff is still in use today? How much was worth the money? How much would you buy over again today? What will your future self think about this year’s purchase history?

Are you in the warehousing business? We laugh about Saudi princes who have warehouses full of sports cars, but many of us do the same thing on a smaller scale. Do you pay for a storage unit? Do you have bedrooms, garages, or outbuildings full of stuff? How much of your belongings have been touched in the last year? Is your big house for you or for your seldom-used belongings?

The best budget system is worthless if you don’t use it. Those who have successfully attacked their spending tend to make a written plan and stick to it. Hopefully these tips can be useful as you craft the path to your secure financial future.

Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your questions or schedule an objective, no-pressure portfolio review at letstalk@telarrayadvisors.com. Sign up for the next free online seminar on the Events tab at telarrayadvisors.com.

Probably the most jarring transition from your working life to retirement is the switch from a periodic paycheck to the idea of living off investments that need to last, quite literally, a lifetime. Planning for this milestone involves a symphony of countless considerations too complex for one discussion, but there is a rule of thumb that can provide great perspective.

A famous 1998 report called the Trinity Study inspired what is known as the 4 percent rule. (The paper was written by three professors at Trinity University in San Antonio, Texas.) It means that for a typical investment portfolio, an investor can take out 4 percent the first year, then continue to withdraw that same amount — adjusted for inflation — each subsequent year for decades and still have a strong chance of never running out of money.

In fact, when the 4 percent rule is examined over time, the Trinity Study points out that there’s a good chance there will be way more money than the beginning balance in the portfolio at the end of the period and only very rare failures where the money ran out.

The reciprocal of 4 percent is 25, which you can use as a multiplier against annual spending to estimate a portfolio size needed to support your spending. To support a lifestyle of, say, $50,000 a year, investments in the ballpark of $1.25 million are necessary to sustain that level of spending for decades into the future.

There are lots of interesting implications from the rule to think about. Minimum wage of $7.25 and 2,000 hours worked per year indicates annual income of $14,500. Therefore, an investment portfolio of $362,500 could probably produce income like a minimum wage job more or less indefinitely (adjusted for inflation). Consider this milestone on the way to longer-term financial goals.

Spending with the four percent rule (Photo: Nathan Dumlao | Unsplash)

The 4 percent rule can give you insight on spending decisions, too. Think about eating out for lunch at work. Imagine you could buy a laminated card that was good for today’s equivalent of a $15 lunch each working day, valid at any restaurant, for the rest of your life. How much is that worth? Assuming 262 work days in a year, the 4 percent rule would tell you it’s worth about 262 x $15 x 25 = $98,250. You could set $100,000 aside in an investment account, pay for these lunches out of it for the rest of your life, and probably never run out of lunch money.

But consider converting an expense like that into time. If you net $50,000 after tax from your job, the four percent rule suggests you’d have to work two additional years to prepare to cover a $15-a-day, five-days-a-week lunch habit in retirement. That may or may not seem like a good deal, but at least this way of thinking helps translate something as innocuous as a small daily habit into a tangible estimate of time — the only truly limited resource.

These examples are all hypothetical and are not a substitute for real comprehensive financial planning. Nevertheless, this might be a useful way to frame decisions about work, retirement, spending, and saving. Maybe you love eating out and two years of work is totally worth it, but maybe that fourth streaming subscription nobody watches at your house will get canceled when you convert it to the extra work to sustain it long term.

Have a question or topic you’d like to see covered in this column? Contact the author at ggard@telarrayadvisors.com. Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions.