“Creating a long-term lifestyle” is something you’ve probably heard of before. It’s said in many ways – “retiring on your terms,” “achieving financial freedom,” and other catch phrases used regularly by financial professionals. But if it’s that easy, why isn’t everyone doing it?
The fact of the matter is, most people don’t know how to create a long-term lifestyle, or choose not to, because they don’t like the short-term sacrifices that come along with it. Living on a budget is not easy to do, especially if you like the feeling of freedom. We’ve helped many of our clients retire sooner or with more freedom simply by making small choices with their budget that took effect in their 30s, 40s and 50s. Here’s how we do it.
If you’ve ever heard of the 50-20-30 rule, you know that it’s suggested your budget be split into three “buckets” – necessities, savings, and lifestyle choices. The first bucket, or the 50 bucket, is for your necessities – shelter, food, clothing, transportation – things you need in order to function each day. The general rule of thumb is to spend no more than 50% of your income on your necessities. This means your mortgage payments, utilities, car payments, all their applicable operating expenses, and how much you spend on food each month.
The second bucket or the 20 bucket is for your savings and debt payments. This also includes contributions to your investment accounts. Finally, the 30 bucket, or your lifestyle bucket, is for items like your cable package, cell phone bill, travel budget, or other activities you do for enjoyment.
Traditionally, the 50-20-30 rule has held up for many people as they make their way through their working years. For many, saving 20% of their take-home pay is an extraordinary achievement. But, when you account for the fact that much of that 20% is put toward debt, mainly student loans and credit cards, many people aren’t saving much for their futures at all. And, more importantly, most people are not correctly attributing payments toward their 30 bucket. What we mean by that is, that a lot of people say that their premium cable package is a necessity and put it in their 50 bucket, when we all know there was life before premium cable.
When we work with our clients on creating their long-term lifestyle, we like to take the following steps that we urge you to take as well:
- Create the perfect picture of your future: What does your life look like when you’re nearing retirement and in retirement? What things are necessary for these phases? What things will be nice to have?
- Evaluate the transition from present to future: What is changing from your current lifestyle to get you to your future lifestyle? Is it significant? Does it cost more or less?
- Be honest about your present: Are you saving all you can? Is there anything in your buckets that can be eliminated or better controlled?
- Get real about what it will take: Are you and your family willing to make the sacrifices in the present to help get you to your picture-perfect future?
- Develop your new budget: What really falls into necessities? How will you manage paying your debt vs. saving for your long-term goals? What of your lifestyle expenses are you willing to part with?
At McCabe & Associates, we don’t believe in a one-size-fits-all solution for any financial decisions. That’s why we work with our clients individually to determine what choices they need to make in order to reach those long-term goals. If you’re interested in meeting with one of our advisors for a second opinion on your financial present and how it’s impacting your financial future, we’d love to hear from you.