Recently, on a beautiful summer afternoon, I sat on the beach with my 31-year-old sister and had a pretty serious talk about a topic that many can relate to: her money (or lack thereof). As background, my sister, while also being funny, smart and beautiful, has a great job in the entertainment industry and is based in New York City. She earns a robust salary and is not, by any means, frivolous with her money. But she simply cannot save. In fact, she is genuinely amazed by people who can and desperately wants to get on track. So we dove in and tried to uncover the hidden mysteries behind her cash flow. Here is what we found:
My Sister Spends A Lot Of Money On Nonsense.
I don’t mean to pick on her because she really is not irresponsible with her money; however, she is also not aware of where her money goes each month. For starters, we quickly realized that her beverage budget is out of control. Yes, you read that correctly—her beverage budget. If you were to add up the money she spends each month on coffee, juice, smoothies, and alcohol, it would really give you pause. If you just calculate her coffee budget each month ($5 per day times 30 days), you are already at $150. Let us not forget the day she gets a second coffee, or decides she wants a carrot juice after yoga. Based on my experience, many city dwellers her age spend between $200-500 per month on just beverages.
Next, we looked at her takeout and delivery purchases. She actually cooks for herself more than most and still spent over $200 that month on food delivery. This doesn’t include her daily lunches that cost approximately $12 per day. Finally, we looked at her transportation costs. Oof. She had taken twelve Ubers that month. She had also charged five cab rides on her card. Her cab and Uber rides that month were over $200. Between drinks, delivery, lunches and cabs, she had spent over $650 that month alone and had nothing (other than some caloric intake from the food) to show for it.
She Has Somehow Mistaken Wants For Needs.
First, before I get on my soapbox, I will say that New York City is an insanely expensive place to live. Rents are sky high, food, toilet paper—just about everything (other than flowers maybe?)—are more expensive in the city than they are everywhere else. I understand that when your first paycheck of the month hits, it mostly goes to the rent. However, somewhere along the line, my sister (and many others who have similar situations), have mistaken things like dinners out with friends, weekends in the Hamptons, weddings in Mexico and vacations to France (she’s there now), as necessities.
Often, when I speak to people who have a hard time saving, they begin by telling me their fixed costs (rent, cable, cell phone bill) and before I know it, they have outlined a pretty fantastic travel schedule from the past 6 months. Allow me to put it you straight—travel, dining out, take-out and personal trainers are all luxuries. If you are having a hard time saving, take a long look at what you spend each month and decide if any of it can be eliminated.
Saving Is Just Not That Hard.
The first thing you will need to do to start on your saving journey is to open a savings account that is not linked to your checking. The reasoning behind this is that you want to start accumulating savings in an account that is not easily accessible to you—especially at the ATM machine. I always tell clients that you should put your savings in a place where it is a bit of work to transfer it to your checking account. If it becomes a chore to get your money out of savings, you are less likely to access it. Trust me, this is true. Once you have opened that new savings account, you can start saving.
How Often And How Much?
First, determine the time (or times) per month that it would make the most sense to divert some money from your checking account. If your rent comes out on the first of the month, it may make more sense to have your savings diverted mid-month. Next, determine the amount you would like to start with. If you mindlessly spend $150 per month on coffee, you should also be able to save $150 month. Start small, wait a month and then determine if you miss the money. Not one of my clients who has implemented this strategy has ever said that they are “missing” $150 per month. After month one, increase the amount by $25 to $50 and keep doing this until you have reached the “pain point”—the point at which you are starting to feel strapped for cash.
Create Savings Goals.
Next, create savings goals for yourself that span the next three, six, twelve and eighteen months. Write them down and share them with someone. Once your goals are in writing, it’s hard to ignore them. “By December 2018, I would like to have $10,000. How much do I need to save each month to get there?” I have a client who implemented this a year ago and has a $50,000 goal by year end. She’s on track!
Develop A Strategy.
Finally, develop a strategy for your savings. Once the money hits a certain amount, do you want to start investing it? Do you want to use it as a down payment? Whatever your goals are for the money, it’s always good to have a strategy. If you plan in investing it but don’t have experience with investing, seek out some professional help. Investing should not be a DIY project.
Let Me Hear Your Success Stories! Many of my clients have implemented this strategy and it has been a very positive change in their lives. Please let me know how it works for you. I would love to hear from you! Tweet me at @kristinmerrick7
Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. Views expressed are the current opinion of the author.
Kristin Merrick, Financial Advisor, O’Keeffe Financial Partners, LLC
Originally published in Forbes Aug 2, 2017.