Jag: Welcome into the Art of Wealth Unbroken podcast. We’re here each and every week to provide you with investment and economic insights. We’re here to discuss trends and developments in the field of finance and retirement. Creating certainty in uncertain times, these discussions can help you make better informed decisions so you can make better financial choices with the wealth you’ve built and are continuing to grow.
Our goal is to help you live the lifestyle you’ve imagined for retirement. Stacey Andres is a registered financial consultant and Michael Wallen joins me today, a certified venture planner. I’m Jon JAG Gay. And for our topic today, Mike, we’re talking about really a universal one here, and that is knowing your budget.
Michael: Hello, JAG. You know, it’s interesting. I went back and I reviewed all of our Life Arc Plan reports for each of the prospects that we’ve had that’s visited our office, since January 1. One consistent piece of critical information was missing. The clients did not know their budget. They were unaware of their actual spending habits. Most had a guesstimation on where they were spending their income, but nothing that could actually be measured.
Jag: This is my surprised face. And since you can’t see it on a podcast, I’m being sarcastic. I think a lot of this, this happens to a lot of us, I think. Um, I think back to when my wife and I were long distance, I was in new Orleans and she was here in Detroit and I’m like, man, I’m spending so much money on airline tickets to come fly and see you.
She said, No,look at your budget, your money’s not going to expensive airline tickets. Your money is going to Starbucks every single morning. She’s like, I bet if you break it down, you’re spending more on Starbucks than you are on airline tickets and course she was right. So I always tell all my single friends do what I did. Marry somebody smarter than you.
Michael: Well, we should always out-punt our coverage.
Jag: Absolutely.
Michael: And we see things Jag, you know, there’s apps that are even being created today. Every time you open up social media, you open up, you know, any of your platforms on your phone, you see these types of apps that are showing you, making us aware of where we’re spending expenses.
I know one came up. I won’t mention the name of that software, uh, just for advertisement purposes. But you know, it was telling people, look here, this is where you’re spending your money. You’ve got this $15 expanse. You’ve got this $15. And as you start adding those up, it starts turning into real money. And during these rising inflationary times, every dollar spent is considered and needs to be accounted for.
Jag: I’m thinking of an app that I use. I also won’t mention the name for the same reason. We’ll talk to each other offline and see if it’s the same app. But yeah, they’ll say, Hey, you spent a hundred dollars more on food in June of 2022 than you did in June of 2021.
And really, these apps have all this information to keep you accountable. That can be really useful tools.
Michael: And people need to understand their expenses because we start getting into, as we’re doing planning with advisors, we start looking at the seven areas of financial freedom, and this was really laid out very well in a CNBC article by Ryan Ermey.
And this is something that we’ve been using for years, but it really just didn’t have it framed in this way. But the first is financial clarity. You figure out where you are financially and where you want to go. Number two, self-sufficiency, you’ve moved out of the parents’ home and you can cover your expenses.
Some level of independency is starting. Then you start getting a little bit of breathing room. You’re saving some money. You’re no longer living paycheck to paycheck. And isn’t that a nice feeling?
Jag: That is a, that was a seminal moment in my life when I got past that point.
Michael: And then we start getting into stability.
You have no debt. And six months worth of an emergency fund. You start becoming an adult, you start adulting now, as they say.
Jag: My wife always has a running joke. She looks at me and says, when did we become the adults in the room?
Michael: Exactly. Uh, then you know, really, if you get to stage five that’s flexibility, and this is where you have at least two years of expenses, say. And you can actually take a year off from work if you needed to.
Jag: Or if you had to, if you had a health concern, if you lost your job, if you were changing careers, if you just needed a sort of a mental reset, all these things come into play.
Michael: If you had a pandemic.
Jag: I wasn’t going to go there. But yeah, I didn’t say it.
Michael: But we have situations that are happening and then ultimately, and this is what we try to strive for JAG with all of our clients is financial independence. And this is where you can live off of your savings or your investments. This is where back in, you know, step two, where you started saving some money and you started getting that self-sufficiency and being able to put it out there. This is financial independence.
That’s where these dollars have now gone to work for you. And your money can work for you 24 7. Right? This is the island of financial independence. Typically. You should consider about a 3% distribution, that’s coming out of your savings or withdrawal rates. So when you’re looking at it, if you had a million dollars in savings, you should consider that you can now safely take out $30,000 a year and that money is not going to be exhausted. And it’s going to last for you over your retirement years.
Jag: Can you enjoy a lovely cocktail on that island of financial independence?
Michael: Absolutely. And the final stage, the final stage is the abundant wealth. And that’s where we see that 1% or half of 1% type of segment of our population. That’s where money is not a concern.
They have more money than they will ever need. And that may be a goal for some. That may not be a goal for others. I know for myself, I don’t think I’d ever get to that point because I would hope that my heart would be charitable enough that if I got into those abundance stages, that I now would just become a distribution center to helping others that may not be in that situation.
Jag: It is interesting to look at these seven levels and we’ll include a link to this article in our show notes, of course, but as you’re covering these levels, I’m sure many of our listeners are saying, okay, I’m at three or four or five or whatever level they’re at. And the big question becomes, how do you get to that next step in the process?
Michael: Well, success. JAG comes from managing what matters. We said in the very early part of the show, people aren’t really paying attention to their budgets. I would say that your budget, knowing your budget is the most critical element of a successful financial plan today, as well as going in through your retirement.
You have to know the difference in your expenses, which ones are inflationary and which ones are non-inflationary. Mostly in times when we’re seeing numbers that, you know, inflation is on a rise of 8.3% or 8.6% on the new numbers coming out. Grocery store inflation is at 11.9%. Can you break down your budget?
Do you truly know how much money that you’re earning that’s going to the expenses. And how much more you should be projecting going forward? In both the short, the mid and the long term, you know, which one of your expenses will fall off of your budget. And then what expenses are you looking at that it should be coming up in the future.
I share with our clients each and every week, as we’re meeting with them, we’re talking through their investment strategies, the single most important element of your investing strategy. Is to know and understand what your budget is now and what it is projected to be throughout your retirement years.
Jag: I think about somebody, for example, who bought a car instead of leasing it, you know, you bought the car, you got X amount of payments til the car is yours.
That’s an expense that comes off the ledger in however many months or years, things like that. And if you don’t know your budget and what your future income needs are going to be, how are you going to know how much risk exposure you should have in your current portfolio?
Michael: That’s absolutely right. And you know, when you’re looking at a car payment that may fall off.
If you’re looking out through retirement, have you considered, you know, the new roof, have you considered a new HVAC unit? Appliances? Just because we retire does not mean that we’re not going to have large ticket item expenses that we need to be preparing for and planning for today. Now, one of the things, JAG, that as it talks about the risk exposure, Many advisers today are over-inflating with their clients.
They’re telling them that you’re going to need this much more money in retirement. And let’s break down the math a little bit here. Okay. If you had a, let’s just say a nice round number, you had a million dollars, you sat down with your financial advisor and he looks at, or she looks at your budget today.
And they project that inflation is running. Let’s just say it a measurable amount for you, is, I’d say 5% across the board. And they say, well, in 30 years, this linear line of your budget, and let’s say your budget is a hundred thousand dollars and we’re going to run that out over your retirement years. And they project that your income needs in retirement are now going to be $200,000 when you get out into your eighties. Well, that is an overinflation of your numbers because not every expense you have is inflationary.
Jag: So what you’re saying is they’re, over-inflating inflation.
Michael: They are over-inflating the inflationary impact. And what does that do for you? If you’re expecting to have a greater or higher level of expense in the future, it causes you to expose your investment to a greater amount of risk so that you can meet that demand in the future.
The reality is if you don’t really break down your expenses between inflationary and non-inflationary and truly understand the difference you are going to overinflate how much income you’re going to need in the future. And that is going to cause you to expose unnecessarily too much risk to your dollars today.
Jag: I want to make sure I follow you on this Mike, because this is a really, really important point. If you are working with someone who assumes that inflation is going to hit everything across the board, assumes you’re going to need more income throughout your retirement to get your money to that point, to meet that need, they may expose you to increased risk in order to try to get that higher return, to meet a dollar amount that you might not necessarily need to get to, because you need to break down the money. And some of it is not going to grow like say gas, grocery stores, etc. Do I have that right?
Michael: Absolutely. And when we look at that JAG, in today’s time where we’re seeing a correction in the market, if you’re overexposed to risk, you’re seeing individuals that could have been in. Let’s say a moderate conservative or a moderate investment strategy to make their plan work throughout retirement. But because of over-inflating the amount of risk needed, then what they’re going to do, they may be in a moderate aggressive to aggressive position.
And what has been the real experience today? Maybe a 5% or 7% greater correction against the assets that they have, which is going to create a much longer time period for recovery. So looking at the numbers, really knowing your budget is essential to understanding and knowing your investment strategy and what is right for you.
Jag: Absolutely. So, Mike, you mentioned the Life Arc Plan at the beginning of the show and how you’ve been running the numbers for your clients that are using this Life Arc Plan. This is a good time to mention that we are making the Life Arc Plan available to listeners of the podcast. If you want to check it out for free, no obligation, you can certainly do that.
You can go to our website. Artofwealthunbroken.com. Or you can give Michael and the team a call at:
Michael: 855-378-1806. 855-378-1806.
Jag: Good stuff as always Michael. Talk to you next week.
Michael: Thank you, Jag.
