It’s step two of our financial independence journey and this week’s step is lifestyle and goal setting. Time to tackle rightsizing your life and living within your means and setting some financial goals. Living within your means does not equate to living like a pauper. It’s not about that. It’s about matching your monthly cash flow to your basic needs and to your goals. Think of it as taking a surgical scalpel to your spending rather than a sledgehammer.
You have already taken step one and discovered who you are financially. Now is the time to review that data and determine what you need to do to reach your goals. These goals should be two-pronged: lifestyle changes and determining how much you need to save and invest for your future. For your lifestyle goals, review your spending and see where you can shore-up or create any cash flow. The big expenses are usually housing, health care, and transportation. For your future retirement goals, you need to have some idea of a target to plan for. Many in the FIRE (Financial Independence, Retire Early) movement recommend 25 times your annual expenses. But – BIG BUT – you need to know those expenses first. I also think you need to add more to this number for the unforeseen occurrences in life such as a pandemic, slow market, or major life surprise.
Let’s start with the big-ticket item: housing. This is where you need to be brutally honest with yourself and ask, are you living above your means? For housing, consider the following:
- Have more space than you need? Time to consider monetizing that space. There’s nothing wrong with considering a roommate as an adult or even renting out part of your home. It’s a means to an end and does not have to be permanent. Set a goal to put your housing to work for you.
- Paying for weekly cleaning or gardening? Consider cutting back and doing some of the work yourself. This alone can net you several hundred dollars to add to a savings and investing goal.
- Consider a smaller, more affordable home or apartment. You might even like the lifestyle change of not spending so much on maintenance.
Health care is a tuff nut to crack. This is one area where saving any money is particularly difficult. First, consider lifestyle options. Eating better and getting a little more exercise is a great way to combat many future health costs. Who has the better health care coverage between you and your spouse? Evaluate if you need to drop coverage from one employer in a two-income household. Younger and healthier? Consider if an HSA plan will save you money. Bonus: it can double as a secondary retirement savings plan! Small changes over time can have a big impact.
Transportation has changed dramatically since the pandemic. If you and your spouse are now both working from home, and you each own your own car, consider if you really do need two cars. Sell one for quick cash. Consider the cost of a year’s rideshare expense versus owning your own car. Still need to own? Consider buying a car that is 12 – 24 months old. New cars depreciate immediately so you can save yourself a lot of cash by researching a recently owned model that may still be under warranty. Look for low mileage and a model that has been dealer serviced or is certified pre-owned.
Survey all paid services: entertainment, meal prep/delivery, media, club memberships, etc. Cut those expenses you are not using and redirect that money to yourself! Chances are you are paying monthly for things you rarely, if ever, use.
Get an app to help you track spending. If you find that you are eating out five nights per week and hitting the local café three times per day, you’ve just identified a spending problem and a savings opportunity. When it comes to savings, remember that savings is a way to pay yourself!
Sell your stuff! Seriously, take a look around and see what items you no longer need. Sell off your old sports equipment, antiques you no longer like, collectibles that are not gaining value, tools, books, art, anything you can live without and that you were never really attached to can go! It’s a good way to raise some quick cash for your emergency fund.
Now that you have targeted and cut or reduced expenses, and raised some extra money, it’s time to set that money aside until you know your next goal – your number. Your number is the amount of money you will need to fund your future lifestyle. If you are looking at retirement, 25 times baseline expenses can be a good start. Others like to target 100% of income replacement. Working with a CFP® can help you zero in on your exact number. That number, will seem daunting at first; downright scary. Keep in mind that it’s a goal, not necessarily set in stone, and may change over time as your goals and values change. It is however, a key starting point!
Again, you don’t have to live like a pauper but really think about how much you are spending on things you don’t need or rarely use. Consider rightsizing your big-ticket items such as housing, healthcare, and transportation. Think about the items and services you actually need and that bring you joy and enhance your life. Match your cash flow to these items and let the others go. Next, identify your savings goal, and get started on building wealth which we’ll cover in the next step. You’ll be glad you did.
As an independent Certified Financial Planner™, I can help you decide how to rightsize your life. Contact me and let’s get started! #talktometuesday #rightsize #Hireaplanner #bonus #income #cash #CFPPro #housing #FIRE #FinancialIndependence #CFPPro #goals