Michelle's back, and today I'm here to talk to you about understanding what life costs you. Seems simple, right? Why is it even important? I mean, life costs what life costs? Well, understanding what life costs and really setting up a system for recording and tracking it is a critical piece to financial planning and to ensure that you never run out of money and that you don't have to suffer a major lifestyle cut in 10, 15 or 20 years from now. I call this the anti budget budget. Why? I'm going to share a secret. Before I entered finance, I absolutely hated the word “budget.” I rebelled against it. I wouldn't do one. To me, there were many reasons. It's worse than the word diet. It feels very restrictive. I thought that doing a budget and sticking to a budget, the byproduct of that was going to be about what I couldn't have and couldn't do. It really had this hidden authority and power over me, like this means school teacher that if I really looked I mean, I was doing it anyway. I was spending the money anyway. Something in me felt like if I really looked at it, it would have authority over me, and I didn't want that. I also had this interesting bias. I believed that budgets were for people who had no money. Wrong. Budgets are a springboard for really important financial decisions. We need to learn how to set them up and we need to learn how to track them. Fast forward to today after working with thousands of women like you, I know you have your own aversions to this horrible word “budget.” You may share some of my reasons. You may have some of your own unique reasons. But I also know from my work is conversations around what you spend and a budget are a massive contributor to marital discord and divorce. So, of course, budget is loaded with psychological mental blocks. It's loaded with negative past experiences. And like most diets, most budgets fail. We're about to change all that.
So right now, we're going to dive in with two Michelle insights and three easy steps.
Insight 1. Many financial plans fail because of overspending, not because you did or didn't earn a certain amount on your money. I'm going to say that differently. Many plans fail not because you did or you didn't achieve a certain rate of return. Many plans fail because of overspending. Why does this matter? No one's ever walked into my office and sat down and said, I'd really like your help figuring out how I'm going to have a dramatic lifestyle adjustment down in 10, 15 or 20 years when maybe I'm 70, 75 or 80. Similarly, no one's ever come to me for advice on how to help them run out of money. Creating a budget and an infrastructure now for tracking what goes out the door can help prevent these two very dramatic life events.
Insight 2. Changing the language around this will change everything and can change everything.
We are going to replace the word budget with lifestyle analysis and we're going to replace the word downsizing and cutting with right-sizing. We're also right now going to dive right into the three easy steps to start.
OK, grab two pieces of paper. And if you don't have them, press pause on the video and get two pieces of paper. Title 1 'Needs' and Title 2 'Wants'.
I want you to set your stopwatch on your phone for 90 seconds.
Needs: This is what you need to operate your household and your life on a monthly basis. List in the next 90 seconds from memory. Don't worry about getting it perfect. This isn't about perfect. It's about starting. This could be your rent, your mortgage, your property taxes, your electric bills, your water bill, your cell phone, your groceries, gasoline for your car, your car payments, you get my drift.
Go ahead and set that stopwatch again, 90 seconds more and grab that piece of paper that says Wants. I want you to repeat the exercise from memory to the best of your ability, start writing down what you spend monthly on your wants. This could include things like vacations, the gym, Soul Cycle, your wine habit. It could be gifts to others, whatever it is. And I realize that this category often doesn't come monthly.
One more tip: Pull your most recent bank statement and your most recent credit card statement and just eyeball it, see if there's anything you missed. Add it to the list of either needs or wants.
Step 3: As I discussed in the beginning, what you're spending matters as much as what comes in. What comes in the door can be things from earned income. You own a business, you get paid that way. You have a job and you get a W-2. What's your after-tax, take home pay every month. It could also be right now – you're retired or you're divorced and you don't have an earned income and you're already pulling money from your portfolio. The goal of a good lifestyle analysis plan is to make sure that what goes out does not exceed what comes in. And while the purpose of this video was not to dive deep there, that's what our eight week course is for. The purpose is for you to understand what life costs to master that half of the equation. I hope one thing this was not intended to make you feel bad or ashamed or guilty about what you currently spend, or if you couldn't easily get your hands or your brain wrapped around on what you spend. That's the dark side. There's no time for that here. We want to bring you to the light side, which is financial clarity. Carve out ten minutes after this video to pull your bank statement and pull your credit card statement and eyeball it for things that you might have missed in the 90 second mental exercise under wants or needs. If you want more assistance, feel free to email us for our Wife2CFO complimentary What Life Costs Worksheet.
Again, this was a high-altitude view of understanding what life costs and how it's connected to so many important pieces of your financial life. And we do a way deeper dive in our 8 week Wife2CFO course – you might be ready.