My recently college-graduated daughter has now entered the brave new world of employment and financial independence. I’m heartened that she is seeking financial advice early in her career, but it’s odd that she seeks advice from friends as opposed to her CFP dad.
It’s really an education looking at the stuff that shows up on her Facebook page, some of which is good and some of which is really awful. “Invest $17,000 per year in your 401k.” (Good advice if you don’t have any living expenses.) “Do a Roth instead of a 401k” (and thereby miss out on the company match). “Invest in the most aggressive funds”, (even though she has never invested in a stock in her young life). “Accumulate 6 months reserve in a savings account.” (I would argue 3 months if you have disability insurance, but I won’t quibble.)
It was stunning to see how many people are so ready to give financial advice while at the same time not knowing a thing about the person’s financial situation and temperament. A person can do real damage to another by offering advice in a vacuum. Can you imagine a newly minted member of the workforce investing half her income in aggressive growth stocks and watching it drop 25% in the next market meltdown? You don’t have to guess what would happen. We know that people panic, sell at the bottom, and swear off stocks forever, thereby seriously jeopardizing their future retirement. But the one dispensing such advice won’t have to live with the consequences.
And then there is the budgeting angle. If you have been successful in establishing and living by a budget, you are among a small percentage of the population who is capable of tracking and recording where your money goes. You are also a better person than I am. I have been a financial planner for over 30 years, and I have never lived by a family budget. This is not to say I haven’t instituted spending discipline. I just go about it in a more pragmatic way.
Here’s what I mean.
Budgets are absolutely essential for businesses, organizations, and governmental entities. (Please stifle your snickers at that last one). But every household has something that these entities do not have. Entities have a long list of needs. They do not tend to spend money on frivolities. (Again, please don’t laugh. We’re talking about the ideal here, not human stupidity). Households, however, if life is to have any pizzazz, must have a certain amount of “just for the fun of it” money that gets spent just because we want to. That’s a very real part of living a fulfilled life. Those things are very hard to budget for and can bust a budget fast.
Understanding the simple fact that individuals are not businesses and therefore operate under different parameters, I recommend a different approach. I start with client objectives and then try to quantify those objectives. I search for the “one number”, the number they can focus on. In most cases the one number is how much that person needs to save and invest each month. Thus we start with the question of how much to save as opposed to how much they need to spend. Once you have that number and are saving that amount, there is little need to budget. After saving, you can spend what you have any way you want based upon your own priorities.
There is clearly a risk in this framework. You just might lose track of how much you spend every month, something that’s easy to do if live on plastic. I never said that you won’t need self-discipline. Whether you budget or not, you must still exercise self-control and a little arithmetic. That might mean reduced use of credit cards. It might mean setting spending priorities. In any case you become accountable for how much you save before you make any decisions on where to spend. How you spend after saving is negotiable and flexible, and it bears a closer resemblance to how life really works.