Upticks: Intentional Spending

By Jake Falcon on January 7, 2021

Intentional spending can be thought of spending with a purpose or guilt-free. Whether you are working or retired, intentional spending is about prioritizing the things you enjoy and that are important to you. In this episode of Upticks, Jake discusses ways to spend your money intentionally, no matter if you are saving up for or enjoying your retirement.

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Intentional spending can be thought of spending with a purpose or guilt-free. People buy boats, golf clubs, clothes or even just a daily coffee—but then feel guilty and experience buyer’s remorse, thinking about how the money would be better served in a retirement or savings account. I want to help you avoid this cycle of stress and guilt around money, because it’s so unnecessary. Here are some ways to spend more intentionally, whether you’re working or enjoying retirement.

Intentional Spending before retirement

Cultivating a habit of intentional spending takes a little work on the front end, but it’s worth it. If you’re still working, the first thing you need to do is calculate how much money you’re bringing home each month after taxes are deducted from your paycheck.

Let’s look at a hypothetical woman named Jane, as an example. Jane makes $120,000 a year and $7,000 a month hits her checking account after taxes. Experts say 50-60 percent of that should go to her fixed costs such as mortgage/rent, food, utilities—the bare necessities. Let’s say Jane spends 60 percent of her after-tax pay on these.  I also like rounding up when calculating this number for the one-off expenses we may not think of like property taxes, home maintenance, etc.

After the 60 percent she spends on those non-negotiables, I would recommend that Jane save at least 10 percent for retirement. This does not include her company’s match in a 401(k) or similar type of retirement account.  This will also depend on where Jane is on her current retirement savings and may need to be adjusted accordingly.

We’re now at 70 percent. The next 10 percent should be placed in a savings account or a liquid investment account, so that Jane has access to money in the event of an unexpected cost or emergency.

After setting aside this 80 percent, we’ve reached the fun part. Jane now has 20 percent of her after-tax pay, about $1,400 a month, to spend however she would like. Because she knows she’s already accounted for her necessities and savings, Jane can hopefully not feel any guilt when she buys a $5 coffee, splurges on new clothes or treats a friend to lunch. If you can properly budget and allocate your after-tax pay, you can avoid the guilt and buyer’s remorse too many of us feel when spending money.  Also once she reaches the $1,400 limit she can politely and confidently decline any offers to spend money in other places until the month resets.

I also think it’s worth noting that it’s fine to splurge on things you enjoy while being “cheap” on things you don’t enjoy. My wife Rachel read or listened to 130 books in 2020! Of course, that means she spends money on books. And most of my clients know I love golf and naturally spend a fair amount of money on it. However, because we don’t value things like coffee or eating lunch out during the week, we don’t spend money on these. In short, it’s all about prioritizing what you value.

After determining your after-tax pay, I recommend you work with competent financial advisors and planners to develop a plan that helps ensure you have sufficient money available in both the short and long term. But this is not a one-size-fits-all exercise, of course. If you’re in your late 30s and haven’t started saving for retirement, you may need to save more than the 10 percent mentioned above.

If you don’t have a financial plan, contact me today at Jake@Falconwealthadvisors.com. We will gladly meet with you to determine how you can embrace intentional spending.

Intentional Spending in retirement

Intentional spending is a little bit different for retirees, as their income isn’t coming from wages, but rather from investments, social security, and other sources. And retirees don’t have to worry about saving money in a 401(k) – they’ve been there and done that. Now it’s time to enjoy the money they thoughtfully set aside over years and decades.

It’s very common to hear that retirees should withdraw about four percent from their nest egg each year. It’s generally accepted that withdrawing four percent annually can ensure the principal saved will remain unchanged (assuming the money stays invested in a prudent manner and earns four percent per year or more).

A four percent goal is great, but we work with many clients who want to spend more than that, especially in their early years of retirement. If a hypothetical couple named Paul and Tina retire at age 60 and have saved $1 million, they may want to live off more than $40,000 a year, or four percent of their savings (and that’s not taking into account any taxes that must be paid when withdrawing money).

At Falcon Wealth Advisors, because we don’t believe in one-size-fits-all approaches, we stress test the financial plans of our clients to help determine just how much they can spend each year. Oftentimes, we learn people like Paul and Tina can feel relatively comfortable spending five or six or seven percent of their savings each year. Or we sometimes determine they can spend seven percent of their savings between ages 60 and 70 but need to cut it down to five percent after that.

What I like about our financial plans is that we can use a target percent as a base and encourage clients to keep all their necessary costs in that target percent withdrawal. After that, any additional money withdrawn can be viewed as money to be spent guilt-free—travel, hobbies, dining out, etc.

At Falcon Wealth Advisors, we can help avoid having your spending outpace your retirement savings. If you don’t have a financial plan, please contact us today. Let’s meet and discuss how you can embrace intentional and guilt-free spending.

Clients choose to work with us to enhance their financial literacy and explain exactly what their financial plan means to them.

-Jake Falcon, CRPC®