Does your family spend too much?

Dec. 1, 2007
How do you know if your family spends too much? How do you know if you are frugal or about average? Finally, do you need to have a family budget in order to get your lifestyle under control?

by Brian Hufford, CPA, CFP

How do you know if your family spends too much? How do you know if you are frugal or about average? Finally, do you need to have a family budget in order to get your lifestyle under control?

I have been through every season of money in my life. I remember when I was newly married. Back then, my wife and I looked under sofa cushions for enough change to go to a movie. As I have grown older, even though my income has risen substantially, I still find that controlling lifestyle spending is important to peace of mind. I am a card-carrying member of "Spender’s Anonymous." Yet somehow I have managed to save a great deal, and have managed to give away a lot of money. I have learned that, no matter how much money I make, there is a balancing act I must endure that is simply part of life. This column is about how to find that balance.

One of my favorite books about achieving financial balance in lifestyle spending is "All Your Worth" by Elizabeth Warren and Amelia Warren Tyagi. In the book, the authors put forth a simple formula to make sense of the problem of overspending. This formula defines financial balance as dividing your income into three categories: 1) must-haves, 2) wants, and 3) savings.

To achieve perfect balance, the authors state that one should spend no more than 50 percent of his or her income on "must-haves," 30 percent on "wants," and commit 20 percent to "savings." I like this formula since it speaks volumes about how to deal with spending problems throughout life.

Early in your career, you have lots of debt (e.g., from student loans, auto loans, the practice, home mortgage, and credit cards). It is likely that younger dentists have way too much of their income committed to "must-haves," which are fixed-budget commitments. We counsel many young dentists, some of whom have as much as 70 percent to 80 percent of their budget committed to these "must-haves."

These items are not only debt, but include taxes, insurance, and basic fixed housekeeping costs. Having too large a commitment in "must-haves" creates much stress and a feeling of living paycheck to paycheck. The remedy to fix this problem is to properly structure debt and large purchases to keep "must-haves" at 50 percent or below in relation to total income.

"Wants" are in balance when they are 30 percent or less of total income. "Wants" are discretionary spending for vacations, hobbies, college for children, etc. These items frequently disguise themselves as "must-haves."

For instance, I cannot tell you how many parents I have talked to who have children that "must have" a $300,000 college education. Frankly, my wants all seem like "must-haves," too. All my children are educated, and I have completed that phase of my life. But recently, I saw an F.P. Journe Octa Lune watch that was the last one available in the world. I thought that I really needed this watch and must have it for my watch collection. The only way I have ever known how to rid myself of these ridiculous compulsions in the category of "wants" is to have a stronger compulsion to save 20 percent of my income.

Frankly, my wife must be the most frugal woman in the world. My need for this new watch is not nearly as strong as my need to not have to explain to her why I bought it, particularly when the American Express bill arrives. If your "wants" — including such items as spending on your children, trying to become debt-free, or spending on a watch collection — are robbing you of the ability to save 20 percent of your income, then your life is out of balance and you will not have peace of mind about money.

Finally, how do you physically control these temptations to overspend? You could read "All Your Worth." There are many excellent systems in the book. I place myself on a fixed salary for lifestyle expenses at home. I pay all my current taxes quarterly, and then I control my "must-haves" and "wants" to no more than 80 percent of my total budget.

Remove the confusion of paying some bills through the practice, some at home, and some through his-and-her credit cards. Create a strategy and try it for a quarter. Achieving balance in lifestyle spending and saving 20 percent of your income is worth the effort and brings peace of mind!

Brian Hufford, CPA, CFP®, is CEO of Hufford Financial Advisors, LLC, an independent, fee-only planning firm that helps dentists achieve financial peace of mind. The company is recognized as the only strategic alliance partner for financial planning services for the Academy of General Dentistry. Contact Hufford at (888) 470-3064, or at [email protected].

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