Meet Mark and Chelsea, a married couple in their early 30s. They had stable jobs. She worked as an administrative assistant and he worked as a marketing coordinator. Monthly expenses included payments for car loans and credit card debt.
Mark had a small individual retirement account, and the couple had saved a bit of money. But they knew they needed to improve their finances because they planned to buy a house and start a family.
At first, Mark and Chelsea didn’t know if they could trust a financial planner. But a friend of Mark’s parents suggested they meet with Roger Whitney, a certified financial planner with WWK Wealth Advisors. During an initial one-hour consultation, Mark said they were advancing steadily in their careers and received periodic promotions and bonuses. However, they wanted to work with a financial professional “so they didn’t screw it up,” recalled Whitney.
Consulting a financial planner is also a matter of efficiency. Working people like Mark and Chelsea are busy. Melissa Thomas, owner of Melissa the Coach Financial Coaching, noted that “financial professionals save a client time. We know the info and teach it to them instead of them having to spend time learning.”
The Different Types of Financial Advisors
You might think that only people with a high net worth need financial guidance. On the contrary, some advisors actively seek out millennials like Mark and Chelsea in the early stages of their financial lives to nudge them in the right direction. And dozens of online companies — like Betterment, Wealthfront and LearnVest — provide affordable and automated investing services.
The major investment houses are also expanding services to include robo-advising. Charles Schwab offers Schwab Intelligent Portfolios, for example, which combines the convenience of automated investing and re-balancing while giving members round-the-clock access to in-house investment professionals.
Read: 10 Things You Need to Know Before Choosing a Financial Planner
If you want a more traditional advisor, you’ll need to know the difference between a CFP and a financial advisor, what services they provide, and at what prices. Some advisors are fee only and are listed with the National Association of Personal Financial Advisors, while others earn commissions based on what products their clients buy. The range of services that a financial professional can offer run from basic planning — which is what Whitney’s clients needed — to formulating complex investment strategies.
Your First Steps to an Effective Budget
Mark and Chelsea were motivated to improve their finances. This was key, Whitney explained. If only one spouse was committed to the financial planning process, no plan could succeed.
Because Mark and Chelsea did not have joint bank accounts, Whitney said their first task was to merge their money and close unnecessary accounts. Afterward, the couple tracked their expenses for two months.
You’ve likely heard this advice a million times: You must record every dime you spend, tracking it on paper or using an online program like Mint. Doing so allows you to account for rent and other fixed expenses in your budget, plus all those after-work happy hour drinks. It’s a dreadful and tedious task for most people, but it’s important. For Mark and Chelsea, tracking their spending allowed them to categorize their expenses and determine how much money they needed each month for “lifestyle spending.”
Why Traditional Budgets Are Restrictive
According to traditional budgeting methods, you assign everything to distinct categories. For expenses that occur once a year — like a vacation — you take the cost, divide by 12, and plug that number into your monthly budget. You then determine how much you’re allowed to spend each month in each category, such as for entertainment or food.
While some people love tracking and comparing their actual spending against their budgets, others dislike feeling constrained. You might even feel guilty if you’ve blown out a category.
Read: 10 Ways to Take the Fear Out of Budgeting
Budgeting Without Categories
Budgeting doesn’t mean you need a restrictive list of categories. Here’s what Whitney suggested to Mark and Chelsea:
- Deposit your entire take-home pay into your main savings account rather than into the household checking account.
- Once a month, transfer your total lifestyle spending budget into your checking account.
- Once a week, talk and update one another about anticipated expenses.
If the two felt a financial squeeze at the end of the month, they would have to spend more conservatively. However, they didn’t have to starve if the account balance ran low. Whitney said they could transfer money from the savings account to make ends meet.
Mark and Chelsea were advised not to move funds around unless they discussed the decision first, however. They needed to understand why they came up short but without blaming each other. Perhaps the fixed amount needed to be adjusted. In the end, the categories didn’t matter — the overall amount they each spent did.
Read: Why You Need a Spending Plan — Not a Budget
While some think that people in their 30s like Mark and Chelsea aren’t consistent savers, a T. Rowe Price study showed that millennials who contributed to their 401k accounts were doing at least as well as their baby boomer counterparts. With Mark and Chelsea’s new method, their salaries and bonuses went straight into savings instead of being gobbled up in the household account.
Where to Put Your Savings
During a brief follow-up call, Whitney advised Mark and Chelsea to calculate their net worth twice a year. They also allocated money for an emergency fund, a vacation fund and their future home purchase. Anticipating these expenses meant the couple would be less likely to tap their savings. It also meant they had clear goals to keep them motivated as they saved money each month.
Read: How to Manage Your Flexible Expenses
Taking an Active Role in Your Finances
After several months, Mark and Chelsea proudly reported to Whitney that they had more than doubled their savings after implementing what Whitney dubbed the “lazy man’s method.” But the couple didn’t succeed by blindly following a plan their advisor pushed. Instead, they succeeded by taking an active role in managing their finances. Mark and Chelsea’s professional financial advisor simply honed in on a course of action and ensured the two tailored the specifics.
Unsurprisingly, Whitney uses this budgeting method to keep his family’s spending in check. No doubt your own finances could also benefit from this form of conscious spending and saving.