After sharing that I was a financial planner, I remember being asked, “What’s one thing I need to know about financial planning?
My answer was simple: “Earn more, spend less.” Your cup will never overflow unless you have more going in than going out.
Another way of viewing that difference between the financial “in” vs. financial “out” is margin.
Simply stated, if you are spending more than you are earning, you have no margin and are going into debt. If you are earning more than you are spending, you have margin and are saving.
It’s the relative size of the margin that makes the difference. According to a recent Bank of America survey, almost half of respondents perceive themselves as living “paycheck to paycheck.” But, perhaps surprisingly, a deeper analysis found that “around 20% of households with incomes above $150K also appear to be living paycheck to paycheck.”
Where do you land? Just enough to make it to the next paycheck? You’re surviving. Saving some (at least enough to have an emergency fund)? You’re stable. If you are saving for long-term goals or even have more than enough, you’re flourishing.
What do you do if you need to increase your financial margin?
Start with “earning more.” If you are still working, you have a lot of “human capital.” How can you invest in yourself to generate more income? Perhaps that means getting that next degree or certification, asking for that promotion, or changing jobs/careers.
“Spending less” is usually the place where you have the most control. It’s been said that if you really want to know someone’s values, you merely need to see their calendar and their checkbook. How does your spending reflect what’s important to you? More often than not, there’s plenty of extra that can be trimmed.
I suggest taking an inventory of what you are spending. Looking back over the last three months (going further back adds too much complexity), divide all expenses into two categories: essentials and non-essentials. Be ruthless on what to count as essential: If you had no reliable income, would you still need to make this purchase?
While everyone’s spending is going to be different, a simple tool is a 50/30/20 distribution:
• 50% for essential expenses such as housing, utilities, transportation, food, and taxes
• 30% for non-essential expenses such as entertainment, dining, and hobbies
• 20% for savings for long- and short-term goals (e.g., emergency fund, retirement), debt repayment, and giving
As you can see, with a healthy margin, you’re able to weather the occasional financial storm, save for the future, and give freely. In other words, earn more, spend less, and enjoy the margin!
Adam Kornegay is a CERTIFIED FINANCIAL PLANNER® and a Certified Kingdom Advisor with APC Financial Planning, which is celebrating its 50th year of serving clients in East Tennessee and beyond. APC Financial Planning is a registered investment advisor.