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What’s Your IDEAL Scenario?

by | Apr 3, 2019 | Financial Basics

Have you ever taken a family vacation by throwing a dart at a map and hopping into the car to go there? Of course not.

Yet this is exactly what many people do with their family’s finances. And it’s why so many families are stuck.

  • Living paycheck-to-paycheck
  • Not ready for retirement
  • Walking on the razor’s edge because there are no back-up savings in case a big expense or job loss crops up
  • Marriages strained by the lack of communication caused by “money issues”

Without a defined financial destination, you’re going to drift through life. And the things that worry you, stress you out and cause you lost nights of sleep won’t change.

I run into a lot of people worked up about saving for their retirement or for their kid’s college education. They know they’re behind and they’re hitting the panic button and have an insatiable need to “do something.”

Yet in almost every case, the way they’re handling their day-to-day finances make it extremely difficult to solve their problem. How can I tell you to save an extra $500 a month for retirement if you’re struggling to pay the bills? Doesn’t work!

This week I want to give you a high-level view of how to think of your family’s finances. Forget where you are today. Instead, I want you to imagine where you’d like your family to be from a financial standpoint. What if you could snap your fingers and make it happen?

The 30,000 Foot View of American Finances

Occasionally I’m invited to give a basic money class to kids at a local toy retailer. When you’re dealing with elementary kids you have to keep the topic very simple and to-the-point.

Are you old enough to remember Bozo the Clown and his bucket game? It was a 70’s thing…

Anyway, I teach kids how to put the money they earn from chores into three buckets:

  • Spend
  • Save
  • Give

At the end of the day, those are the three things that anyone can do with their money, other than burning it.

Despite its simplicity, this exact same concept applies to the PARENTS of the children attending the class.

Have you ever wondered how American spend their money? Well, I have some statistics for you!

On average, American SPEND 92 cents of every after-tax dollar that comes in the door. By spending, I mean the cost of food, shelter, cars, healthcare, vacations, new iPhones, etc.

The Personal Savings Rate published by the government suggests that American save 6% of their after-tax dollars. Meanwhile, Giving USA reports that Americans gave north of $400 Billion in 2017, which amounts to 2% of after-tax dollars.

Is that enough? Consider that nearly 30% of people in American have NO retirement savings in the bank. Also consider that we now have over $1.5 TRILLION of student loans outstanding in our country, more than double the amount 10 years ago.

The issue for many Americans is that Saving and Giving depend on how much they’re spending on their lifestyle. If lifestyle spending is too high, it crowds out the ability to save and give.

How Are You Doing?

You can do this exercise for yourself. Here are the three things you need:

  1. How much do you make after-tax each month?
  2. How much are you saving with those after-tax dollars (i.e. Traditional/Roth IRA contributions, 529 College Savings contributions, etc)
  3. How much do you give each month?

Now take #2 divided by #1. That’s your savings rate.

Next, take #3 divided by #1. That’s your giving rate.

Finally, take 100% – Your Savings Rate – Your Giving Rate. That’s your spending rate.

How do those three numbers compare to what the typical American is doing?

Now listen up…there’s no “right” answer when it comes to these percentages. Every family is different and will have different needs and views about giving. That’s fine.

The question I’d like you to ponder is “Am I happy with those numbers?”

What’s Your IDEAL Budget?

If you’re looking at your numbers and aren’t happy with them, then here’s what I’d invite you to do. Come up with your IDEAL scenario. If you could snap your fingers and “fix” your finances today, how much would you be putting into the Spend, Save, and Give buckets?

The easiest way to do this is to figure out two numbers:

  • How much would you like to give if you had the ability to do it? If you’re a church-goer, would you like to be tithing? Or tithing more than you are today? What non-profits would you support if you had room in the budget? Add up these amounts.
  • How much should you be saving? If you need help, you can use my online Retirement savings calculator. It’s pretty easy to use. If you need help, simply refer to an earlier post I did about this.

Now figure out your IDEAL Savings and Giving rate just as you did above.

Enter your “Now” and “IDEAL Month” below:

Free Coaching: If there’s a big gap between where you are NOW and where you’d like to be, don’t beat yourself up. You’re part of the MAJORITY of people in this country.

But if you’re looking at that IDEAL Month and thinking about what life would feel like if that’s what you were actually doing TODAY, then I invite you to commit to move towards that!

Will it take time? Yes! Maybe months. Maybe a couple of years.

But the point is to identify the things that are impeding your ability to achieve your IDEAL Month right now. These things might include:

  • Having too much debt. Monthly debt payments (excluding mortgage) might be eating up a ton of your budget.
  • Living in too expensive of a home/apartment. Does it take an entire paycheck to pay the mortgage, real estate taxes, and insurance? If so, you might own a home that’s too expensive for your family’s current income.
  • Are your car payments too high? We all love our cars. But driving a Lexus vs. a Honda might be impeding your ability to save for your child’s college.

Visualize the Destination – Then Make it Reality!

I joked earlier about how no one plans their family vacation by throwing a dart at a map. No. We think about the warm weather. The beaches. Throwing our kids into the pool. Hiking.

When we take our families on vacation, we have a VISION of where we’re going. That makes it a lot easier to squirrel money away for that vacation. The destination motivates us!

Take that same approach with your family’s finances. Look at that IDEAL Month and imagine what life would be like if you were doing that TODAY. Would you be happier? Less anxious? Hopeful about the future?

If the answer to any of those questions is YES then it might be time to do something about it. You don’t have to settle for where you are. Today can be the day you and your spouse decide that it’s time to live into a NEW future.

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