April is National Financial Literacy Month, so Wellview will be sharing financial fitness-related blog posts each Friday this month. Regardless of where you fall on the financial literacy scale, this is a good time of year to take a few minutes to learn something new and/or to consider your finances and come up with some ways to tweak or improve them (a financial spring cleaning). Please note that these blog posts are for educational purposes and we are not offering individual advice. For personal recommendations and support, please reach out to one of our Accredited Financial Counselors (AFC) or a Certified Financial Planner (CFP).
Financial literacy “unfun” fact: According to an NFEC study, the average U.S. citizen lost $1,634 in 2020 due to financial illiteracy (not understanding personal finances).
I often compare the stages of financial coaching to a three layer cake: the first layer is basic budgeting (income and expenses), the second layer is savings, and the third layer is investing. In my opinion, you can’t really tackle the top two layers well until you prepare that foundational layer of knowing where your money is going and making sure you are living within your means. This week’s topic is income, expenses, and budgeting, which are foundational components of personal finance.
For the purpose of education, let me define the three types of expenses:
- Fixed expenses are the monthly expenses that are—mostly, if not exactly—the same each and every month. This is your rent or mortgage payment, your loan payments, your cell phone bill (give or take a few dollars), or insurance bill, and any subscriptions or membership fees you pay on a monthly basis. I often put utilities in this category even though they aren’t “fixed” per se, but they tend to be about the same every month (at least seasonally).
- Variable expenses are the monthly expenses that vary month to month, depending on what we are doing, feeling, or have going on in our lives. This is what you spend each month on groceries (depending on who you are feeding and what you are eating), dining out, your clothing expenses, household expenses, gifts given, fuel costs, etc. When reviewing a budget, this is an area that we spend some time on because it’s usually this category that answers the question, “Where is all my money going?”
- Periodic expenses are the expenses that come up consistently, but not on a monthly basis. This is your annual Amazon Prime membership, or your insurance bill if you pay it every six months. Some utilities are not monthly (e.g. trash), and there could be sports/fitness fees for yourself or your family. We often forget about these expenses because they aren’t monthly, however, they can add up, so it’s important to flag them and know when they are due and how much we need to set aside for them each month so that they don’t create stress when they are due.
Here’s an example of the budget template I like to use with participants, at least initially, as we figure things out and personalize the budgeting experience so that it works for them. Income and all three types of expenses are in here, as well as the difference between income and expenses. A participant may add, edit, or delete names, dates, or descriptions, but most of their financial information will be collected in this one place, so there is no question of how much do I owe on that loan? or What is the interest rate on my credit card?
As I mentioned earlier, when I start working with participants on their budget, the two main areas that we spend time on are debt payments (loans, student loans, and credit card debt) and variable expenses. Debt payments (especially credit card debt) are payments in the present and future that reflect decisions we made in the past. As such, they tend to be a little “loaded” emotionally, so we want to approach them carefully and intentionally.
Variable expenses are the expenses we tend to focus on when we are trying to “cut back,” and volumes of books and materials have been created to help us curb them (there are even television shows on “extreme couponing”). The thing with variable expenses is that while we need to be careful with them because they can vary, and are often based on our emotional state, the goal is not to be a miser and live so tightly that we aren’t really living at all. There are a lot of creative ways to manage variable expenses, so if this is an area you want to explore, please reach out for support.
While we are on the topic of expenses, another layer to add—especially to our variable expenses—is the concept of needs versus wants. We tend to do this naturally as we review budgets, but a lot of times, needs versus wants aren’t clearcut and may be highly individualized. For instance, I’ve worked with many participants for whom tithing is a value and is a need, not a want. We must always be mindful of our values, so please know that there is no one cookie-cutter way to budget. What works for one person may not work for another, and the only budget that ever works is the one that you will actually use, so a lot of patience and grace are needed as we unpack this area of personal finance.
There are four questions you can always ask yourself before you purchase something large (or small, like at the Dollar Spot at Target):
- Did I plan to buy this?
- If I have to pay cash for this, do I still want it?
- What will happen if I don’t buy this?
- Do I need this or do I just want this?
Sometimes I’m working with a participant who has a budget, and they are doing everything right, but money is still tight. There is no wiggle room, and they are not overspending at all. This is the point I remind them that expenses are only half of the dynamic duo, and we shift gears to income. For some reason, we always tend to focus our energy on cutting back on expenses, but in reality, some of the simplest ways to balance a budget (and live within our means) is to increase our income. Are we due for a raise? Can we take on a side hustle until we pay down some debt? A simple internet search can yield dozens of ways to increase your income (like this). Again, we want to be personalized and intentional about this, so please know there is not one solution for everybody.
Another thing to consider on the income side is your paycheck withholdings. If you are finding it difficult to make ends meet each month, but you get a huge tax refund each spring, you may want to consider changing your W-4 withholdings so that you get some of that money each paycheck versus once a year. This can easily be done through your employer or payroll provider. For more ideas on taking home more money, please review this link.
If you’ve made it this far, I would like to gently check in and ask how you are feeling. Are you inspired? Overwhelmed? A combination of both? Please know we are here to help you support you on your wellness journey, so please reach out to one of our Accredited Financial Advisors if you have questions or want to create a personalized approach for yourself.
Source: Spend Me Not
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– Tanya Runci, AFC, BA, MA, ADE, NBC-HWC
Health Advisor | E-Mail Tanya