You’re Probably Wrong About Your Spending
A financial or retirement plan is based on a projection of how much income you will need in retirement. But experience shows that most people are as much as 30% off when estimating their spending and, therefore, what they will need in retirement.
Transcript below:
Speaker 1 (00:04):
Welcome back to 30 Minute Money. It's the podcast that delivers action-oriented smart money ideas and little bitesize pieces. I'm Scott Fitzgerald at Rock Fox Recording and production in Bushnell's Basin just outside of Rochester, New York. And joining me on the show is Steve Wershing from Focused Wealth Advisors. He is, uh, the superhero of financial planners .
Speaker 2 (00:27):
That's me. Well, we
Speaker 1 (00:28):
Already determined that you don't wear the tights anymore. Well, you
Speaker 2 (00:31):
Just told me not to rip my shirt open while I'm sitting here, then would not be. He, he wants a family show. He keeps
Speaker 1 (00:37):
Wanting to do that , stop ripping trip. All right. So, so today, uh, this is actually a subject that's, uh, really near and dear to my heart, , because, uh, I know that I'm doing it wrong or I'm not paying attention, spending
Speaker 2 (00:51):
Spending.
Speaker 1 (00:52):
We're all doing it wrong. We're not paying attention and we're not, you know, money's just, you're probably lying
Speaker 2 (00:56):
Out. You're probably wrong. You're probably wrong about it. Whatever you think, you're probably a little wrong. Yeah. Well, and so first, let's, first let's talk about why is this important? Why is it important when you sit down with your advisor or when you sit down to write your financial plan? Why is it important? Because the spending is the basis of the whole plan, right? Yeah. When, when we like the, you're, most, everybody's biggest goal is gonna be retirement. And what do you need to know? If you're gonna write a retirement plan, you're gonna need to know how much you spend in retirement, and that's probably pretty close to what you spend now. So you need to know. Now that may seem obvious, but here's the thing that is not obvious. Um, first of all, nobody tracks spending. Okay? And, and I'm talking statistically, I've had people come in who do in fact track spending, but most people don't.
Speaker 2 (01:43):
So don't feel bad if you don't, because you've got a lot of good company that most people just don't. Um, and so what we're reduced to is, well, what do you think you'll need? And we, we try, I try never to be happy with that, you know, with with asking that question. Because when we've tested it, when we've studied it over time, what we find is, well, well, I'll ask you. Fits if, if you, of all the people that come through and do retirement plans, the people who estimate spending, how far off do you think they are on average?
Speaker 1 (02:13):
Oh, I'm sure they're way off. Yeah. They've gotta be way off. Yeah. Like maybe even by half,
Speaker 2 (02:18):
Almost. It's 30%, 30% people on average, you know, people are off by about 30%. Think about
Speaker 1 (02:25):
All the things that you drop money here and there and this and that. Yeah. And you just, it goes out. You don't even think about it.
Speaker 2 (02:31):
Right. So there's those things that you just don't see. And, and unfortunately, I mean, fortunately and unfortunately, we've become kind of a subscription culture mm-hmm. . And so now that you can set everything up to automatically debit your card or, or come outta your bank account, it becomes invisible. And you can use that to your advantage. But on the expense side, it works clearly against you because you forget after a while. Yeah. You forget that it's happening,
Speaker 1 (02:54):
Especially when you do those yearly. So in this business here, yeah. A lot of my software is a yearly subscription. Yep. Um, and I, you know, I, I tend to pay the yearly because it's cheaper. Right. You save money, you know, than rather than doing it by month. And so I actually have learned, and I started putting it in my calendar when those hit, because quite a few times in the past I'm like, do boom, $300 gone? Because yeah, this just renewed a minute. I'm like, oh my goodness, what is that? Oh yeah, I need that. Yeah.
Speaker 2 (03:27):
Yeah. But, well, and, and you know, true confessions time, I, you know, part of the reason that we forget is that there are, there are so many things that you can sign up for these tiny little charges. Yeah. And they add up over time. So I, I will admit, and you know, like I said, true confessions, , I have a subscription for toothpaste. And so every three months I get a little tube in the mail and, you know, I bought it because I thought, well, this is kind of an interesting idea. And I thought I'd, I'd order it so I ordered it, didn't pay close enough attention. Three months later, a package shows up and I'm like, wait a minute. And I look at my credit card, sure enough, there's the debit. And it's like, so if, if you
Speaker 1 (04:06):
That much toothpaste
Speaker 2 (04:07):
Every three months, everything I get, well, that's why I get this gleaming smile . Now you have to dub in the bing is it, you know, reflects the light, reflects off my teeth . So, you know, so, you know, if, if, if I, if I can inadvertently sign up for, for a subscription for toothpaste, you know, don't feel bad. It happens all the time. So one of the, one of the reasons the things, you know, that people lose track is because they set these things up automatically. But another reason is because of what you just pointed out before. And that is that not all expenses happen on a, on a regular con, you know, frequent basis. So yeah, we buy groceries every week. We buy gar, uh, gas for the car every week, but you know, there, there's this bill that comes in once a quarter, or you know, the property taxes come in once a year and we forget those things. We forget if, if we sit down and say, okay, so what am I gonna need? Um, we forget that once every six months, this charge, or like in your case, you know, for that software and whatnot, every year it pops up and look, oh, that's right. I gotta cover that too. Yep. And so it's really easy, it's really easy to lose track.
Speaker 1 (05:14):
And that's not even considering the just random, you know, my daughter wants a Pepsi, or, you know, you know, and you just little weird purchases here and there that aren't consistent.
Speaker 2 (05:26):
Yeah. We'd call them impulsive buys. Impulsive buys, impulse buys, impulse buys
Speaker 1 (05:29):
Everything. Impulse, everything in my life is an impulse buy
Speaker 2 (05:32):
. And so, yeah. You know, we, we don't, you know, we, we, we know, oh, well, you know, we know we buy groceries and we know we fill up the car with gas and we know, but when you do an impulse buy, you, it never gets into memory. It just, you do it and it's gone. And so, so if, if people are off by an average of 30%, obviously you're gonna put together a plan that that's worthless, right. Because of 30% difference. Yeah. That huge. I mean, that's huge. That's just, that's, you can't build a plan on that. So the other thing is that if you wanted to try to keep track and, and, and earlier in my career, you know, we would, we would encourage people, you know, track your spending for a little bit. It's a little bit like, you know, if you go to a trainer and you want to, you know, lose weight, build muscle, that kind of stuff, they'll say, keep a diary of everything you eat. Yeah. And so everything you, every time you put something in your mouth, write it down. That is a chore. Yeah. That is a pain in the butt. And if you have to do the same thing with money, that just gets to be, that just gets to be really hard.
Speaker 1 (06:27):
It's also, uh, you know, sort of come to Jesus moment for a lot of people because it's like, oh my gosh, do I really buy that much Starbucks ? You know?
Speaker 2 (06:36):
Exactly. Yeah. Yeah. Oh, I gotta write this down. Ooh. Yeah, exactly. Um, but times have changed, so now there's an app for that.
Speaker 1 (06:47):
There is.
Speaker 2 (06:48):
And so it used to be, you know, it used to be, I would never even dream of putting my groceries on a credit card, but now I put everything on the credit card, I just pay it off every month because it makes everything perfectly trackable. You know, I, I don't, I don't, I try not to carry that much cash anymore because if I spend cash, it doesn't show up in my records, but if I put it on the credit card, it shows up there. And so there are all kinds of applications that you can use to track it for you. So tracking expenses is drudgery, no question about it. So delegate it to a machine. Um, one of the, you know, probably the oldest application, um, to use for that is Quicken. The, um, so if, if you're, you know, if, if you wanna keep track of your household finances, you can get Quicken. I've been using Quicken, I've been using Quicken for probably 30 years. And so if you wanna, if you want me to tell you what I spent for gas in 1998, I could do that. I dunno why you'd wanna know that, but I could, I could probably tell you.
Speaker 1 (07:42):
I know it's a heck of a lot cheaper than it is now. Yes,
Speaker 2 (07:45):
It is. . Yes it is. Um, so if you get, um, some kind of, you know, personal finance software, you can download into that. But these days there are all kinds of applications that can help you track this stuff so that you have accurate records. The one that we use on a, for the planning system is a system called E-Money. And it's, um, it's probably the most widely used financial planning system among financial advisors. It's owned by Fidelity and we use it for all kinds of things, but you can also connect all of your accounts to it and they will automatically download into it. And one of the, one of the reasons I we like it is because the, um, the clients can let us see spending by category. So whenever we update a plan, I can just call up E Money and see what they've spent in the past 30 days or 90 days or that kind of stuff. And I can say, are we on track? You know, or are we still where we thought we would be? And
Speaker 1 (08:36):
How detailed does it break it down? Like groceries, this, that, like all that kind of stuff?
Speaker 2 (08:41):
Yeah, yeah. Yeah. Typically, you know, if I look at one of those reports, I'm looking at 12 to 15 categories, you know, it breaks it down pretty well and you can break it down even further than that if you want to. Is
Speaker 1 (08:49):
That a free service or you have to pay for it?
Speaker 2 (08:51):
Well, if you're a client, it's free. It's just part of the service. Okay. You know, because we consider it part of the plan. Cool. Yeah. And that's nice too because the client can log into the system and they can see their net worth at any, you know, they can, there's one source they can go to. Yeah. And they can see not only the accounts they have with us, but they can see any account they hook up to it so they can instantly see what their net worth is, which is, you know, which is nice when they, when they wanna keep track of that kind of thing. But if, if you're not working with a financial advisor, there are plenty of other things that you can use that are real popular out there. Some of the big, some of the biggest names are Mint Good Budget. You need a Budget or Winab, Y N A B. Um, there are a couple now that are kind of interesting, true Bill and Rocket Money. Um, we'll keep track of expenses, but they will also identify those little subscriptions that we were talking about. They will identify them and they can cancel them for you if you want. So one of the things that is also true, you, I don't know if you've experienced this or not, but when you sub, you know, subscribe to something and then trying to get it to stop.
Speaker 1 (09:50):
Yeah.
Speaker 2 (09:51):
That's, you know, they don't make it easy to find on their website. That's deliberate.
Speaker 1 (09:54):
Amazon's like that too. Do you ever do Prime with the, the channel Primes? I do. And some of the channels in Prime Video.
Speaker 2 (10:02):
Oh yeah. And
Speaker 1 (10:02):
You're like, oh, I added discovery cuz I like all these documentaries. Right. And then trying to find a way, and you can't do it through the app, you have to be online. Oh, right. On the website. Yeah,
Speaker 2 (10:12):
Exactly. So Shifty
Speaker 1 (10:13):
Bazos,
Speaker 2 (10:14):
Well, even, even, even like that toothpaste I was mentioning. Yes. I think I went back to the site to say, how do I stop this? And it was not, it was not clear was not, you cannot obvious, right? I mean, I could have contacted him, you know, but I looked at the price compared to Wegmans, it's pretty close. So I didn't worry too much about it. But, you know, they, they don't make it easy. And like I said, that's deliberate. So, um, but true Bill and Rocket Money, if you sign up for those services and you look at this and it says, here are all the 15 things that you've subscribed to that you paid this month, you can just very easily through the app, you can have them cancel it for you. So that's, that's worth, you know, if, if, if that's a concern of yours, that makes one of those apps particularly interesting to look at.
Speaker 2 (10:53):
Yeah, yeah. Um, so knowing the overall planning, knowing the overall spending can confirm, um, your plan. And we just, we talked about it a little bit ago, the next step is to break it down into categories is, you know, how much am I spending on groceries? How much am I spending on eating out? How much am I spending going out to the theater? How much am I spending on entertainment? How much am I spending on subscription channels? Like you were just saying? Because the more detail you have, the more choices you can make. If it, if, if you have like four or five or six basic spending categories, well what are you gonna do if you say, I'll drive, you know, I really wanna spend $500 less per month. That's not gonna give it to you. But if you have 15 or 20 categories, now you've got information right now you can look at it and say, okay, here's the obvious target, let's look in this category for the things that maybe I can cancel or do less of.
Speaker 2 (11:46):
Again, financial planning, from my standpoint, um, it is all about, all about, uh, choice. It's not about you should do, and it's not about, you know, trying to artificially constrain yourself. It's all about making choices. And so the, the more information you have, the more information you have to make choices. Um, so once you've broken it down into categories, um, and you set those up in your app, most of those apps will memorize the companies that you deal with. So for example, the first time you connect Wegmans with groceries, most of these systems will let you, will will memorize that for you. You might prompt it, or they might do it automatically so that every time it sees something coming in from Wegmans, it will automatically, um, at a groceries, put it under groceries. Right. So what what I find with clients is that, you know, you, you, you invest some time in the first month setting it up. Yeah, yeah. And maybe a little time the next month, and then you're pretty much good to go. You know, it's like you don't have to straighten you, you have to straighten out transactions every so often, but you've really done most of it right there. And so put a little bit of effort in upfront and you know, you'll, you'll have really good, reliable information that you can base a financial plan on months or years into the future. And
Speaker 1 (13:00):
Most of us are, are creatures of habit and routine anyway. So, you know, there's definitely gonna be some consistency throughout every month.
Speaker 2 (13:10):
That's right.
Speaker 1 (13:11):
Occasional variations here and there.
Speaker 2 (13:12):
Yeah, exactly. That it's Pareto all over again. It's, you know, the 80 20 rule. Yep. It's 80% of your expenses are from 20% of your, of your, of your vendors. So yeah. So you put a little effort into it up upfront. I also want to talk a little bit about budgeting and, and my perspective on it because this is closely related to it. You know, I'm, I'm not a fan of just picking numbers and saying, I will not spend any more than x on groceries or on gas or on those things. Especially if you haven't gone through this exercise already. Because if you don't know what reality is and you're just making numbers up, oh yeah. You can't stick with that. You're gonna be really disappointed. You're gonna be upset at yourself for, oh, I didn't realize I spent that much at Wegman's. Or, you know, I didn't realize how much was going in gas.
Speaker 2 (13:59):
So from, so I, I I try to look at budgeting a different way and, and for me, budgeting is looking at cash flows at the end of the month and asking the question, is this what I thought would happen? Mm. So for me, budgeting is just comparing, um, what you thought was gonna happen to what actually happened. Right. One, what if you look at that and there's a difference, then you can say, well, what should I think about this? You know, is this something I should do something about? Or is this something, is this a reality I I should just adapt to? And again, you know, I I I, for all kinds of reasons, the psychology of I should just doesn't work out real well. So as long as we can make it a choice, as long as we're giving you options and you get to choose whatever you think is the best choice, it's something that, um, that you can live with a lot more easily. It's something that reinforces your autonomy, gives you agency, and it ma and it makes it a process of making decisions as opposed to feeling like you're boxed into certain things.
Speaker 1 (14:58):
Right. It's just like when you're trying to lose weight or something, or you're trying to cut something outta your diet. I'm not gonna have ice cream right now. You really want ice cream because you're denying yourself that ice cream, but Exactly. You say, I'm gonna try to eat less ice cream over the next month. That's
Speaker 2 (15:14):
Right.
Speaker 1 (15:15):
Try
Speaker 2 (15:16):
I'm well we'll go back to Yoda attempt,
Speaker 1 (15:19):
Right? Yes. Try,
Speaker 2 (15:20):
There is no try. Yeah. There is only do or not do. Yeah. Um, yeah. Or, or you can say, I really like ice cream, I'm gonna reward myself on Sunday after dinner by having an ice cream.
Speaker 1 (15:32):
Yeah.
Speaker 2 (15:33):
There's no knot, there's no cutting it out. Right. You're just choosing that you're gonna eat ice cream on Sundays. Right. And so that makes it a little easier to deal with. So yeah, it's a lot like dieting, it's a lot like controlling your diet
Speaker 1 (15:45):
And with, and with, with the budget, like you said, making sure that you have the information first so that you can then look at it, see what the reality is, and then make your choices from there. Which is,
Speaker 2 (15:58):
That's the critical thing. Too many people go into this starting out with saying, here's what I'm gonna spend. Well, you should start out by tracking expenses for three months and then say, what did I learn here? And if you wanna make choices at that point, great. But you're exactly right. You're exactly right. That's what a lot of people get turned off by budgeting because that's the way they approach it. That just, uh, that's not an effective system. It doesn't work. So. Yeah. Exactly.
Speaker 1 (16:24):
Your retirement is at risk, not from the stock market, not from inflation. Taxes are putting your retirement at risk. I'm certified financial planner, Steve worshiping and I specialize in helping people create low tax retirements. Unmanaged taxes can take 30, 40, even 50% of your retirement income. Learn how to defend yourself against excess taxation. Our complimentary webinar will cover all the principles you need to know to protect your money for you and your family and keep it away from the government. This free webinar will cover how taxes are different in retirement, the taxes you pay in retirement that you don't have to pay during your working life. How to move tax savings into a tax free environment. The Widows Tax, the Secure Act, the Secure Act 2.0 and what they mean to you. The webinar is free, but you have to register to save your spot. So go to focused wealth advisors.com/webinars and find out more and sign up right there. Even if you're not planning to retire for the next five or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and to sign up today.
That's an interesting little tidbit of information. There we're probably wrong about our spending. What's your 30 minute action list? 30
Speaker 2 (16:35):
Minute action list. 30 minute action item is research some tracking apps and pick one to use. Pick a tracking app and get started with it. That's my 30 minute action item.
Speaker 1 (16:44):
I'm gonna do that.
Speaker 2 (16:45):
Excellent.
Speaker 1 (16:45):
I'm all about it now. I've actually, uh, already thought about it when I saw the list of what we were doing and I saw the i I checked out a couple of these apps Okay. Already. So I'm all over it. Well, that's the episode of 30 Minute Money Today, and you can find us@thirtyminute.money and on your podcast platform of your choice. Check me out at rocvox.com if you have any podcasting needs or voiceover needs, and Steve can be found at focusedwealthadvisors.com. We will see you next time on 30 Minute Money. Thank you.