September: The Taxes Post!

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Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find August’s post here.

 

Have you ever had a surprise at tax time? Maybe you owed a lot more than you expected to, or got a much bigger refund than you anticipated (and that last one sounds nice, but it’s really not all that great - more on that later).

 

If you’re a regular salaried employee, you completed a W-4 form when you were hired. That form instructs employers to withhold a certain amount of tax from your pay. The amount depends on how you answered questions like whether you are married, whether you only have one job, if your spouse also works, and how many dependents you have. These are the personal allowances you claim - the more you claim, the less tax is withheld, and the fewer you claim, the more tax is withheld. You can even claim zero allowances to have the maximum amount of tax withheld.

 

Important: this number isn’t necessarily the same as the number of exemptions and dependents you claim when you file your tax return - that number is based on specific rules about whom you can claim as a dependent and what filing status you use. This number is just a way to manipulate the withholding to achieve a particular result. The two numbers don’t have to match.

 

If you’re self-employed, you pay estimated taxes quarterly based on your income, at a rate similarly decided early in the tax year.

 

One of the problems here is that it’s hard to predict what will happen throughout the year. Maybe you got a big unexpected bonus. Maybe you were out of work for a couple of months. Maybe your spouse had a big career change. Maybe the baby turned out to be twins. The point is, we’re at a good spot in the year to assess your situation and figure out if the year will end more or less as you expected it to, income tax-wise, and if not, to make some adjustments. So gather your most recent paystubs for all jobs worked this year (and income, expense and quarterly estimated tax information if you’re self-employed) and maybe last year’s tax return too and check out the IRS’ withholding calculator: https://www.irs.gov/individuals/irs-withholding-calculator

 

The calculator will tell you how to adjust now so that you end the year having paid very close to the correct amount of tax, IF you provide the correct inputs. Use last year’s return as a guide for credits and deductions. Remember to include all of your income for this year, including jobs you left, to make sure you get the most accurate picture. If there’s a change to be made, you’re still in time to do it, or at least be aware of what awaits you when you file a return.  

 

If you have been significantly underpaying, you might have just saved yourself a penalty. The IRS prefers that you pay your taxes all along, and imposes this penalty if you do not pay at least 90% of your tax for the current year or 100% of the prior’s year’s taxes, whichever is smaller.

 

On the other hand, if it turns out that you’ve been overpaying, it might not feel all that urgent to change anything, and in fact you might be looking forward to filing and getting the money back. But in general, it’s better to have the money all along. It is yours, after all, and you’re not earning anything on it. If you have debt, you could have been paying it down throughout the year, saving significant interest expenses. And if you can invest that money, that’s potentially a year’s worth of compounding you’re missing out on. So go conservative if you want, but don’t overpay by too much!

August: The Life Insurance Post (And Beneficiary Update Reminder!)

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Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find July’s post here.

 

How do you know if you need more life insurance? Should you have any at all? What kind? What should you look for?

 

It’s likely that you have people, other than yourself, who are depending on either your income or on the services you provide (stay-at-home spouses and parents, that means you!), then you should have a policy in place to replace that income or that work if you die. There will probably also be end-of-life costs like medical and funeral expenses, and you want to make sure the money is there for those too.

 

At its most basic, life insurance pays a stated benefit to your named beneficiaries if you die. Very broadly, life insurance is split into two types: term and permanent.

 

Term insurance offers just the death benefit: you purchase a policy - let’s say it’s a 20-year, $1 million policy -  and pay the premiums. If you die during the 20 years, your named beneficiaries get $1 million. If you don’t die, the term ends and no one gets anything (you haven’t died though, so that’s pretty good). It’s simple and inexpensive. And if you stop paying your premiums during the term, the policy lapses and you no longer have coverage. Many policies are renewable, meaning that once the term ends, you can renew for an additional term.

 

Permanent life insurance offers the death benefit of a term policy, but without a predefined term: as long as premiums are paid, coverage continues. In addition, it builds up a cash value over time that can be withdrawn, borrowed against, or used to pay premiums later. This sounds nice, but in practice the additional savings feature is pretty expensive, and in my view the extra money you would pay for a permanent policy over a term policy is better directed toward a savings or investment strategy with a stated goal and characteristics you control (and with a return you get to keep) - I like to keep functions separate, so insurance should be insurance and investments should be investments. Permanent insurance has its place, but generally speaking, until you have a pretty complicated estate situation, term is just fine.

 

But how much do you need? There are several factors that affect the calculation:

  • How much annual income needs to be replaced, and for how long? OR
  • How much will it cost to hire someone to provide the services you do, and for how long - this means childcare, meal preparation, house upkeep and maintenance and other tasks? Think seriously about how life would be impacted
  • If there is a stay-at-home spouse, would they be able to return to work if needed? Would they require skills training or education?
  • Do you want to provide college funding? If so, how much and when will the children start college?
  • Do you have a mortgage you would want to pay off so that your family can remain in the home?
  • What other debts are outstanding?
  • How much do you have in savings now, both in qualified retirement accounts and taxable accounts?
  • Do you anticipate needing to provide for elderly parents?
  • How much insurance do you have now? It’s likely you have some coverage through your employer, probably equal to one year’s salary. Some employers allow you to purchase more (supplemental) coverage, and even spousal coverage, and this can be a good deal price-wise. But remember that this coverage is not portable - if you leave your job, you can’t take the policy with you, so make sure the new job has similar options.

 

Everyone’s situation is different, and a good financial planner will help you navigate the particulars. But there are some needs analysis calculators available online that will at least get you in the ballpark. Remember too that you don’t necessarily need the same amount of insurance for the entire term: you likely will need the most while your children are very young and labor-and-cost intensive. Term layering is the strategy of “stacking” policies of different terms, to give you the most coverage when you need it, and less as those needs cease - the kids are out of the house, the mortgage is nearly paid off, etc. It often costs less than one large policy covering the entire term.

 

A nice feature of life insurance is that the process to claim the benefit is pretty simple: the beneficiary simply calls the insurer to file a claim, provides a death certificate, and the benefit is paid. It’s tax-free to the beneficiary and occurs separately from the will or other estate issues, so there’s generally no delay and can be done very soon after death - helpful in covering those final expenses.

 

Very very important though: make sure those beneficiaries are correct. In fact, that’s really this month’s objective, along with understanding your life insurance needs: take a look at your beneficiaries (life insurance policies, 401ks, IRAs) as well as how your bank accounts are titled, and make sure they say what you want them to say. These instruments are considered “will substitutes”: that means your will doesn’t dictate what happens to them when you die, the beneficiary form or bank account title does. And if an ex-spouse or parent is named the beneficiary instead of your current spouse, well, that’s who will get the money. So make that the one thing you do right now: look up the beneficiaries and update as needed!

July: the 401k Post

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Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find June’s post here.

For July, I thought we’d shift gears from talking about cash flow. Let’s discuss your 401k instead.

By now you’ve probably seen John Oliver’s hilarious recent segment on retirement savings in general, and 401K plans in particular. He, rightly, pointed out the importance of understanding the fees you pay to invest, and how the power of compounding works both in your favor - investing early pays off! - and against you: even seemingly small annual fees make an enormous dent in your eventual wealth. And for long-term investments like retirement savings, that matters a lot. How much? For a one-time $30,000 investment, losing 1% annually to fees over 30 years results in a loss in eventual value of about $50,000. And if you invest a regular annual amount, starting at $6,000 and increasing by inflation for 30 years, paying an extra 1% in fees leads to a loss of $130,000. That is real money. 

It’s important to note that both of these isolate the effect of just a 1% difference in fees (expressed as a difference in return). Nothing else changes: we hold the rest of the assumptions (performance, contribution rate, inflation rate) constant in order to highlight just how big an impact a relatively small number can make over time. Remember, you need to control what you can control! Market returns, tax rates and interest rates are squarely in the “cannot control” column. Expenses are something you can control somewhat, so it’s important that you do that where you can. But the truth of the matter is that it can be really difficult to tell what fees you’re paying in your employer plan. There are two kinds of fees: those associated with your account and those associated with the investments in that account. Here’s how you can get them.

First, locate copies of:

  • Your plan’s Summary Plan Description (available from HR)
  • Your plan’s Summary Annual Report (available from HR)
  • Your most recent statement (mailed to you or available on your plan's website)

On the Summary Annual Report, find the following:

  • The administrative expenses (an example from one I found online: $332,193). Make sure this number does not include benefits paid to participants.
  • The total plan assets at the end of the year (from that same one: $451,665,355).

Then:

  • Divide the first number by the second: $332,193/$451,665,355 = 0.000735, or 0.0735%
  • Multiply the result by the total value of your account on your statement (let's imagine a $50,000 account balance): .000735*$50,000 = $36.75

This is your portion of the expense of running the plan itself. However, it’s also possible that your employer is covering this fee, and you’re not paying it at all. In general, the larger the firm, the more likely that these costs won’t be passed on to participants (but then again, the larger the firm, the lower the expenses are likely to be in general). The Summary Plan Description will tell you, as will asking your HR department directly. It’s also possible that your statement will list all of these specifically, but it’s still good to check with the overall plan information.

The next fee (or group of fees) relates to the specific investment choices you’ve made. Here as well, the information is available, but you might have to do some digging. Ideally, all of the investment choices - those you’ve opted to invest in as well as the ones you haven’t - are listed clearly on the statement, with their expense ratios, or the amount you pay each year to own the fund. That’s unlikely to be the case though, so look up the menu of choices in the Summary Plan Description document, or on the website you use to access your plan account. But don't just add up all the expense ratios of the funds you've invested in! Here's what to do:

  • Make a list of all the funds you own, the amount invested in each, and its corresponding expense ratio. Here's a sample:

FUND ABC    $25,000  0.75%

FUND DEF    $10,000  0.55%

FUND XYZ     $15,000 1.25%

  • Multiply the amount invested in the fund by the expense ratio:

FUND ABC    $25,000*0.75% = $187.50

FUND DEF    $10,000*0.55% = $55.00

FUND XYZ     $15,000*1.25% = $187.50

  • Add up all the results: $187.50+$55.00+$187.50 = $430
  • Divide that by your total account balance: $430/$50,000 = .0086, or .86%.

Ideally, you want a broad range of low-cost index funds (the ones in the sample above are pretty high, but unfortunately not unusual for a typical plan). You will likely have some target-date funds available as well, which can be good choices depending on your situation. While fees aren’t the most important thing in making investment choices, there’s certainly no need to pay more than you have to for the same products. If you don’t know what choices are best for you and how to weigh it all with outside investments you may have, a qualified fee-only planner can help sort it all out and guide you to setting the right allocation from the available funds.

Add the two numbers you calculated above to find your total annual fees: .0086+0.000735=.009335, or .9335%

So now you have all the information for the expenses associated with your employer plan. What do you do next? How high is too high? Well, it’s difficult to say, but in general you don’t want to pay much more than 1% overall (smaller firms will be on the higher end, larger firms on the lower end, just due to economies of scale). If you find that you are, you might want to have a conversation with HR about your concerns. It’s a big deal for a lot of people, just not one that is particularly clear. Look up your firm on brightscope.com to see how it rates - sometimes having an outside opinion will help cement your case.

Also, while being aware of the fees and taking action to address them if excessive is absolutely something you should do, understand that this service does cost money to provide; there’s a lot of regulation and legal expense and paperwork and technology involved. So be realistic in your expectations, but the more pressure is put on plan administrators to make expenses transparent and reasonable, the better for everyone.

 

June: the cash flow management post

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Here’s the next in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find April’s post here.

Here we are, halfway through the year already! It’s been a pretty interesting few months, and the next few promise to be similarly unpredictable. It's a great time to refocus on what you can control, like your spending. In prior months, we worked on centralizing your spending to gain insight into your habits and patterns. How much money will you have at the end of this month? How much will you have after six months? Now that you have enough data, let’s do something with it.

First, export the data to an Excel file. Once exported, sort the information so you can single out the irregular/non-monthly expenses, and set them aside.

Next, total up all of the regular spending and divide by the number of months. This will be your average monthly spending number. You will build your cash flow plan around this. For simplicity, we will assume that all the expenses will continue to be managed from one payment method (because now that you’ve done it for a while, you realize it really does make things clearer, right?)

Create a monthly projection that shows:

  • Opening bank account balance
  • Take-home income, according to your pay schedule
  • Expenses, as above and also include other items that weren’t captured (rent or mortgage, for example)
  • Transfers such as savings, 529, or investment account deposits
  • Debt payments
  • A reserve for the irregular expenses you identified above, so you can accurately anticipate them. You can either average them as with the monthly expenses above, or if there are a limited number, just add them to the relevant month

Project this out for at least a year. Apply increases or changes as appropriate (anticipated pay increases or bonuses, inflation). Now you have a pretty accurate snapshot of your finances over the next several months. 

Let’s look at what else is hidden in those numbers. How much savings is built into your current cash flow (both aftertax transfers and pretax contributions to retirement accounts)? Take a step back and look at the big picture. How much money do you have left at the end of the projection? Are you comfortable with the number?

If you want to change it, you have two options: spend less or earn more. To spend less, the likeliest target is the monthly all-inclusive spending amount, since that’s the one that includes your most discretionary spending. (You can also look to lower your housing expense, for example, but that’s going to be a tougher task). You can go back to the data you exported and create categories to help you lower your spending in a particular area, if you like. But since, as I say to everyone, a dollar’s a dollar, it doesn’t matter what you cut. An easier solution is simply to reduce that overall monthly amount. How low should it be? Low enough that you have to think about your spending.

This is how I manage my household finances. Here’s a secret: I almost never meet my spending goal. I’m almost always a little over. But just a little. That’s how I know it’s the right level: I need to keep an eye on spending in order to keep it under control and meet our saving and other goals. If it were too high, there wouldn’t be a need to keep spending in check (and in all honesty, we’d find something to spend the money on). If it were too low, it would be unrealistic and would mean that the projection isn’t accurate. So try to identify an amount that works for you in that way, and it's fine to do it in small steps: if you ultimately want to reduce your expenses by 20%, you can do it 5% at a time so it’s not such a shock (and that way, you’re more likely to stick with it). 

Don't be afraid to experiment: once you have it all in a usable format, you can create different scenarios (paying down debt quicker, increasing 401k contributions, taking a big vacation, picking up some side income) and get a sense of how the result makes you feel. Remember, the goal is to get into the habit of mindful, intentional spending. So now that you can predict the future, you can reshape it almost any way you like.

BICs, BICEs, the DOL and You

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Big news recently from the Department of Labor (the DOL): the financial advisor who is making recommendations on your retirement accounts will soon have to adhere to a fiduciary standard, meaning they have to put your financial interests ahead of their own.

You’re probably thinking one or more of the following:

Um. They weren’t already?

Essentially, no. Financial advisors (and there are many, many different interpretations of that term) were not required to be fiduciaries when providing investment advice for retirement accounts. Registered Investment Advisors (regulated by the SEC) have always been subject to the fiduciary standard, while brokers (regulated by FINRA) have been subject to the suitability standard. The difference: under a fiduciary standard, the advisor must make recommendations that are in your best interest; under the suitability standard, the advisor can choose to recommend a product that is right for you, but not necessarily the best/least expensive option. Starting next April (with a transition period lasting until the end of 2017), any advisor making recommendations for IRA’s will be subject to the higher standard.

Why is this coming from the Department of Labor?

The DOL governs workplace retirement plans under ERISA (the Employee Retirement Investment Security Act of 1974). Those rules were put in place to provide a standard of conduct for advisors assisting plan participants. But those rules haven’t changed since 1975, and of course, the world of retirement investing has changed a lot since then, away from defined benefit plans and toward IRAs and 401ks. So this is a way of ensuring the same rules continue to apply regardless of what form your retirement savings take.

What changes?

Over the coming months, financial institutions will begin implementing Best Interest Contracts, or BICs, with their clients. (This will be a contract between the client and the institution, not the client and their advisor.) Without this contract in place, no commissions will be able to be earned. The contract stipulates that even though commissions are being earned, the best interest of the client must be upheld, compensation must be reasonable, and information about the products and compensation must be disclosed. For example, an advisor would need to ensure this is in place before recommending that a client roll over a 401k to a new IRA for the advisor to manage. In practice, this is likely to be integrated into current client agreements rather than presented as a separate document.

If the client and the institution have the BIC in place and its rules are followed, that constitutes a BICE - a Best Interest Contract Exemption; basically, an acknowledgement that the advisor is acting in a fiduciary capacity and will adhere to best-interest conduct standards; and that the institution has policies and procedures in place to ensure compliance and will not incentivize advisor conduct contrary to the standards.

Other institutions will qualify as Level Fee Fiduciaries, meaning they are compensated via a level fee, disclosed to the client, calculated as either a level percentage of Assets Under Management (AUM) or a set fee that doesn’t vary by investment, as in the case with retainer fees. Advisors that qualify for this exemption will still have some regulatory requirements: a statement of fiduciary status must be provided, and likely will just be made part of the client agreement, the standards of impartial conduct must be met, and reasons for recommending a rollover (for example) must be clearly documented, including a comparison of the costs of each option. But for many fee-only advisors, this will not represent a significant change to how they were already operating.

That all sounds pretty good, but what about non-retirement accounts?

It’s true, the new rule only applies to advice given on retirement assets. Most people have non-qualified (or taxable) accounts, real estate, debt, and savings for other goals. And many assets may be earmarked for retirement, but for the purposes of this rule, and investing in general, “retirement assets” refer to those in a qualified account or plan (like an IRA or employer plan). And everyone has planning considerations relating to home purchase, education funding, cash flow management, and insurance needs. None of those are covered by the new rule; the DOL would have no authority over that.

Gahhhh.  

Yes. It’s possible that an advisor can provide fiduciary-standard advice for your IRA while still only having to meet the suitability standard for your other assets, and satisfy the rule.

So what now?

We're already seen some changes: some big firms like MetLife and AIG have given up their advisory business altogether; Charles Schwab will no longer sell mutual funds with sales loads.

Actual enforcement of the rules is envisioned to begin in April 2017. Between now and then, advisors will adapt new policies and procedures to ensure compliance with the law. Overall, this is definitely a step in the right direction. But there’s no guarantee that the rules won’t be weakened later. So take the opportunity to find out some things about your advisor (or to look for one, if you’re searching).

During the transition, a good idea is to check in with your advisor to get their thoughts about how the rule change impacts them. Industry pushback against the rule (from large broker-dealer firms primarily) was significant, and a future in which the small investor could no longer be serviced was held out as the nightmare scenario if the rule was passed, with the reason given that it would become too expensive and cumbersome from a regulatory perspective to assist smaller clients. While this is likely just industry posturing, it brings up important questions to ask:

  • Will this be a significant change in how your firm operates?
  • Have you been a fiduciary all along?
  • Once the change comes, will you be a fiduciary for all the advice you give me, or just for the official retirement assets?
  • How will your compensation change?

Obviously, the easiest/least complicated/most likely way to get yourself unconflicted advice 100% of the time is to work with a currently fee-only advisor, who under the rule will be operating under the Level Fee exemption but who already meets the standard sought anyway for all advice given, not just that pertaining to retirement assets. My sense is that eventually, everyone will move to that standard, but that will take a lot of adaptation in an industry not known for being nimble. I really think that long-lasting, true change will come only when demanded by the public.

April

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Here’s the fourth in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find March’s post here.

How are you doing with centralizing your spending for a few months? In May, we’ll begin to use that data for something.

And how did you do with the March challenge - do you feel like you have better insight to your emotional response to spending money? So much of financial planning rests on emotion and behavior, and how we approach money. Understanding those behaviors, and why you do what you do when it comes to money, is an enormous part of making decisions that will make you happy in the long term.

A question: where does your cash live? In previous posts I’ve talked about the importance of emergency savings. A key aspect of that is where that emergency cash is - ideally it should be somewhere accessible, yet still separate from your regular spending money (it should be available quickly if you need it, after all); not be exposed to the swings of the securities markets, and hopefully providing the highest possible return while still meeting the other criteria - note that this won’t be a high return (since it’s not exposed to market or default risk), but you can find ways to get a return that’s higher than you would otherwise earn.

But first, spend some time to understand the characteristics of where the money is now. Is it mostly in checking? A bank savings account? Something else? First, make sure it’s FDIC insured - this covers up to $250,000 per depositor, per bank in case of bank failure. If you’re not sure whether your bank or saving institution is covered, check here. Any cash you have, whether for spending or emergency/goal saving, should be in an account at a covered institution.

Then, determine what you’re earning on that cash. Look at your last statement, where it will probably be listed. Typical rates on regular bank savings accounts these days are around 0.02% (checking accounts pay even less, but have a lot more flexibility). Prevailing rates at online savings accounts are above 1% - while this isn’t terribly high by any stretch of the imagination, it’s higher than most banks. It means about $10 more per year in interest for every $1,000 you have saved, and without putting your money at risk.

To pick a new savings account, make sure you can easily transfer between your savings and checking. Savings accounts have a limit of 6 transactions per month before the bank can charge you a fee, so make sure it’s one where you can do what you need in one step.

This is just one of the little things you can do to ensure mindfulness with your money, every step of the way. 

March

ZOM5QYEIMV Here’s the third in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success (and only a day late!). You can find February’s post here.

 

How’s it going with collecting your spending data? Last month’s goal was to begin centralizing all of your spending in one place for ease of analysis later. Has it been a difficult switch? If so, why? Were you spreading your expenses around to multiple credit cards, and a debit card, and using cash for other things? Was there a reason for that, or was there no rhyme or reason for what things get paid by which method?

 

And most importantly: explore your emotional reaction to committing to one method for all your expenses. If you chose a credit card is your method, were you tempted to ‘cheat’ and simply pay cash for some things? After all, if it’s not reported on the credit card it doesn’t count, right?

 

I suspect the above is a very common reason why budgeting is so hard for people: accountability. It’s so, so easy to convince ourselves that “one little purchase” won’t hurt. And the thing is, it probably won't: one purchase isn’t likely to blow your budget. But what it will do is propagate the feeling that spending is something to be ashamed of and hidden, rather than something you do because you really want to, and you know you can, and you planned ahead and prepared for it, and it will bring you real happiness. The purpose of using one payment method for all spending is so that we can really find the overall spending number that will work with your plan, and allow you to achieve your other, longer-term goals.

 

I think it’s really critical to work all these reactions and feelings out now, before we start really putting any numbers down. Take the next couple of months to really commit to the step, and confront any resistance you put up for yourself.

 

In the meantime, some other, non-budgeting steps to take:

 

Make your 2015 IRA contribution: April 18 is your deadline for filing your tax return, as well as the deadline to fund an IRA (traditional or Roth) for 2015. Get those contributions in!  The maximum amount you can invest is $5,500 (if you’re under 50) and $6,500 (if you’re over 50). If you’re wondering whether you’re under the income limits: here’s the IRS guidance for traditional deductible IRA income limits if you’re covered by a 401k or similar plan at work, if you’re not, and if you want to contribute to a non-deductible Roth IRA instead. (I’ll cover the difference between Roth and traditional IRAs in a later post.) Even better, if you feel comfortable you will be within the limits for 2016 as well, automate your current-year contributions too! You will get another year of growth.

 

Fund your health-savings account for 2015: April 18 is also the deadline to make a 2015 contribution to a health-savings account. (Maximum contributions: $3,350 for a single taxpayer, or $6,650 for a family). Like an IRA, savers over age 50 get an additional $1,000 catchup contribution. If you have a, high-deductible healthcare plan, a Health Savings Account can make a great extra savings vehicle for investors who are maxing out their contributions to their traditional 401(k)s. You get to deduct the contributions in the year they are made, they grow tax-free, and qualified withdrawals are tax-free.

February

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Here’s the second in a series of monthly posts focusing on meeting small, manageable financial objectives in order to create a path to overall financial success. You can find January’s post here.

Budgeting is everyone’s least favorite financial planning topic (except actual financial planners - we love them, but tend to call them something else so clients don't walk out of our offices). It conjures visions of deprivation, a second job’s worth of listmaking and tracking, and a general overall lack of fun.

Another reason no one likes budgets is that they’re hard to stick to. But I think that’s because when most of us make a budget, it’s based on what we want our finances to look like, not on reality. Then when we try to live that way, reality bites back, and it’s easy to feel like a failure.

Instead, for this month’s objective, we’re going to go about it a little differently. Before you can make a real budget (or spending plan, or cash flow projection), you need to know what the actual expenses are. And in order to do that, you need to be able to gather all your expenses, without missing anything. So this month’s challenge isn’t to create your budget - that will come later. For now, just commit to one spending method for as many expenses as possible, whether that’s cash, a credit card, or a debit card. Use one thing for everything, so you don’t have to look in so many places to figure out where the money is all going. I have some opinions about which method is best for most people, but for now don’t worry about making drastic changes - the whole point of this is to meet achievable objectives, right? - just pick the one that’s easiest now, and commit to using only that for a few months.

And here’s what will genuinely be the hard part: don’t change your behavior otherwise. Spend and save and earn as you normally do. In three months you will use the information gleaned to create an attainable budget based on actual numbers. Understanding your spending habits is the key to success.

While the spending information is building itself up, take some time to think about what you’re really trying to achieve. Make a list of the ultimate objectives of the exercise: more savings? More organization? A better sense of control over where your money is, and where it’s going? Or something else? When it’s time to create the budget, we will use both of these important pieces of information - the expense data and your objectives - to craft a plan that is rooted in reality but also shaped to get those objectives met.