What are your annual living expenses? It's a question we ask ALL of our clients. Why? Because it is CRITICAL to your financial plan. The most common answer we get? I have no idea.
Why do so many people not know the answer to a question that is so critical to their financial plan? Because budgeting sucks. Plain and simple. When we hear the word "budget", we cringe and turn our heads. Budgets mean not buying that new car we want, not going out to eat on Friday night, not taking that vacation this summer. They mean we have to keep track of every trip to starbucks and every $5 Frappucino. They mean no fun.
So let's stop talking about budgeting. Let's focus on something I like to call "cash flow awareness" instead. Ok, ok I know what you're thinking - you can't just change the name to make it sound better. But to me cash flow awareness is much different from what people typically think of as "budgeting". Let me explain.
When you have a budget, you limit the amount you spend each month in any particular category of spending. So maybe you skip that nice restaurant this week and go to Chick-Fil-A instead, so you can keep your "dining out" expenses under budget. It's all about sticking to limits.
Being cash flow aware doesn't mean limiting yourself, it just means being aware of what you have spent. Going through this process can be eye opening and in some cases you might find that you naturally reduce your expenses once you know what you are spending.
A UCLA study last year found that people who downloaded the popular personal finance app Personal Capitalreduced their expenses by 15.7% on average after downloading. What is their secret? Cash flow awareness! Just like Mint.com and many other personal finance sites, you are able to link your various credit card and bank accounts, and the app will categorize your transactions and let you know how much you are spending each month. The study found that just being aware of what they were spending helped users reduce their expenses.
Now I'm not saying if you download this app you'll magically cut your spending. I'm just trying to illustrate the power of being aware of your spending. While it might help you cut your expenses now, more importantly it will help you plan for your future. You can't determine how much money you need to retire or how much you should be saving if you can't answer the question, What are your annual expenses?
If your answer to that question is "I have no idea", you need to make an attempt to become more cash flow aware. That might just mean signing up for one of the many personal finance sites out there. If you'd prefer to have someone help you with this, just let us know. We'd be happy to help you get set up online or we can manually review your statements for you. Understanding your cash flow is important and we are here to help!