Jon Gay

TRANSCRIPT

Jag: Welcome to 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 Wallin is a certified financial planner who joins me today. I am Jon Jag Gay. And for our topic today, Mike, we’re talking about the top three reasons why an expense plan is needed during recessionary times.

Michael: Hello, Jag. Well, the belt is tightening on personal budgets. With increased cost. We’re seeing across every expense item in our budgets, both on discretionary and non-discretionary spending. It’s critical to understand where our money is going and on today’s show, we’re going to give some definition, a framework, so to say, to each of these areas, as well as discuss those top three reasons why really understanding the expense plan is the most important aspect in my view of navigating through these high cost, low market return times. 

Jag: Yeah. And we’re recording this on Friday, July 1st. It’s gonna publish right at the end of the holiday weekend here. So it’s timing couldn’t be better. You mentioned discretionary and non-discretionary. Give us a framework of what the difference is between each of these two. 

Michael: Well, discretionary spending refers to those non-essential items, such as recreation and travel entertainment. You know, we’re on the holiday weekend right now. Buying fireworks. You know, consumers purchase these items when there’s enough income left over after paying all of their necessary expenses, such as their mortgage and their utilities. So that discretionary is what I call qualitative spending. It’s the thing that brings value and quality to life.

It’s the fun expenses that we have. Now, non-discretionary spending is those essentials, those non-negotiable spending items that we have in our budget. For example, your rent, your food, mortgage payments, those items, your utilities, those items that are non-negotiable. We have to have ’em. 

Jag: Have you heard of this woman that went viral last year? Her name’s Marie Kondo. It’s about cleaning out your place. Have you heard about this? 

Michael: I haven’t. Share with us. 

Jag: Okay. So her whole thing is find what sparks joy. So the idea is, as you’re cleaning out your closet or your kitchen or wherever. Look at something. Does it spark joy? If it doesn’t, get rid of it. If it does, you can keep it. I think the discretionary spending you’re talking about here is kind of like finding what sparks joy in your life. 

Michael: It is. And, you know, oftentimes in that discretionary spending, we get to that point where we start looking at those items being needs though, versus wants. 

Jag: So I’d imagine when you work with your clients, sometimes you find that the lines between discretionary and non-discretionary can get blurred, right?

Michael: Absolutely. We’re looking for those items that are essential and not luxury items. And that is the first thing. We would look at is the first reason why you really need to understand and do a full assessment of your budget. And I’ll give you for example here, Jag. Last week I was working with a client.

Her and her husband came into the office and we were working through our Life Arc Plan. We were doing our budget items through there. When I first sat down with them, they were saying, I need to have an income plan right now. We have a very narrow margin between our income coming in and what our expenses are.

And so we started working through that process to find a net positive monthly cash flow. Now, as we were going through there, the client had told me, well, I believe my budget is around $25,000 to $27,000 a year. Going through the Life Arc Plan, all of a sudden the client identified their actual spending was around $40,000 a year.

Jag: Wow. Big difference. 

Michael: Absolutely. It was a shock to ’em and really came to a point where they were needing an extra 18 to $20,000 a year to offset that. So I said, well, one thing in times, like we’re experiencing today where we’re having low market returns, your portfolio is not yielding that, so the next place we have to really go to look is look at the budget. And let’s start line iteming every single expense that you’re doing and let’s categorize those.

Are those discretionary or non-discretionary? And that was the way we first started dividing out their expenses. 

Jag: So it’s funny because I’ve done this where I looked at my budget and what I think I spend every week, every month, every year, versus what I actually do spend. And I think what happens, it happened for me and what happens for a lot of our listeners and clients that you deal with Mike, is that when we figure in our budget, we list those non-discretionary expenses. The rent gas, water, heat, et cetera, but we tend to overlook the discretionary stuff, whether it’s going out to eat, going out to the movies, entertainment, you know, luxury items at the grocery store, things like that. I think we tend to overlook those. So it is sound advice to take inventory of where your money’s going each month.

It’s fiscally responsible. I’m sure many of our listeners like to find ways to reduce their expenses each month. And it’s probably a good place to remind our listeners. You and Stacey are offering that free subscription to your proprietary online system. You mentioned it a moment ago, The Life Arc Plan. A-R-C. The Life Arc Plan to assist them in getting their financial, their investment, their legal documents, get their whole house in order.

And you can, take advantage of that by going to our website, artofwealthunbroken.com. Again, artofwealthunbroken.com. It’s linked in our show notes. You can click on a free offer to complete the process. 

Michael: Absolutely. The first reason you want to do it is to take an assessment. And then we look at the second reason that you want to really understand your budget is an expense plan is needed to understand the difference between inflationary and non-inflationary expenses.

This is captured also in the Life Arc Plan portal. So let’s say we have a listener, whether it’s a pre-retiree or retiree on the show today. And they’re earning around $40,000 annually. They’re just making by each month with a positive cash flow. They’re probably very nervous with all the news cycles that are coming around.

Every news story that’s covering inflation is talking about an eight point half percent increase in inflationary, uh, expenditure to the core CPI with inflationary increases on the non core CPI items all above 20%..I mean, we know what gas prices have gone up to. We know what other energy costs have gone up to.

We know that food cost is double digits right now as well. So if you took an average, inflation probably is over 20% right now. And for many people that are on a fixed income, let’s say that’s $40,000. If you thought all of your expenses were inflationary, you would go from 40,000 to $48,000 of expenditures next year.

Jag: Yikes. That is a lot. 

Michael: Well, it’s not accurate and that’s not actually the way that you calculate it. So what I would encourage our listeners to do is really sit down within that budget. You can use our Life Arc Plan system, to help guide you through that process, but really look at your expenses and divide that between your inflationary and your non-inflationary.

Because what you’re going to find is a bulk of your expenses every month are actually non-inflationary. If you have rent, if you have a mortgage, if you have insurance premiums, if you have installment notes that you’re paying a payment each month on, those do not go up by inflationary expenses. So once you identify those non-inflationary expense items in your personal budget, Then you’ll have a better feel of what your future income to expenses are going to look like.

So when you’re projecting out your current and your future expenses, taking out the inflationary adjustment on the non-inflationary items, It’s gonna bring it into a more realistic view. And for instance, JAG, if you were sitting out there and let’s say you had a $40,000 annual budget, if you just apply a 4% inflationary rate, we know the rule of 72 says that in 18 years that $40,000 is going to become $80,000. 

Jag: It doubles. Yeah.

Michael: It doubles, but that’s not realistic because that $40,000 you have today, not all of it is going to have an inflationary adjustment to it. So we don’t want to over exaggerate what our future need is going to be. 

Jag: We have talked in previous episodes, Michael, about the financial media. We’re not talking left, right, red, blue. We’re just talking about the financial media itself oftentimes exaggerating panic to a point and you hear all the headlines, grocery prices are going up. I’ve seen it. My wife has seen it. We’re spending more at the grocery store, but just because we’re spending more at the grocery store, doesn’t mean that our mortgage payment went up.

I think that’s really important to dig in, like you said before, non-discretionary versus discretionary and non-inflationary versus inflationary. Two really good steps in getting a true assessment on your expenses and taking control of your personal plan. Now, how does controlling your expenses assist you in building a more complete and overall plan?

Michael: Well, a financial plan is just like a jigsaw puzzle where every piece is needed to create a full picture. Every piece is standalone, but also has interdependency with the other pieces. Investing is determining how much return is needed on your money today to create a safe withdrawal plan in the future to meet future expense requirements.

It’s building a plan today to make sure that the two lines, the income line and the expense line will intersect at a precise time in the future. 

Jag: Oh, now you’re going back to geometry. Okay. 

Michael: Well, I… 

Jag: Or is that algebra, calculus, trig I don’t even remember what, what that is. Okay. 

Michael: It’s math. It’s just math. 

Jag: Okay, perfect. Continue. 

Michael: So the number three reason I wanna share is if you know your future value expense budget, many investment advisors will take the total current budget like we mentioned a moment ago and calculate a future value based on an arbitrary inflation rate. That creates a linear expense line in the future.

That is overinflated, and quite honestly, inaccurate in the mathematics. If you follow the previous two steps that we mentioned, get the real expense items and then do the future calculation, you’re going to be much more accurate. And what you’re going to do is reduce the amount of exposure that you have to have on your investment portfolio.

So when an investor simply builds an investment plan, Based upon their willingness to absorb losses. In my opinion, they are just gambling JAG. 

Jag: May as well go to Vegas.

Michael: May as well go to Vegas. I believe in investing with a purpose, only exposing one’s assets to the least amount of risk necessary to achieve an objective.

If it takes 5% annual rate of return for an investor to make sure their income line intersects with their expense line in the future, then why expose their assets to an investment plan that is designed to return 10% annual rate of return?

Jag: I know what you’re gonna say next. Higher returns are gonna necessitate higher risk, right?

Michael: Yes, absolutely. Everyone likes the idea of having higher returns, but no one likes the environment where their portfolio value decreases.. IE the times we’re in today. And what that really does is it causes the income line to get pushed farther out on an individual’s personal timeline into their retirement years.

Translation. You gotta work longer. You gotta reduce your expenses. You gotta change that qualitative side of your life. So you may have less discretionary income. So you may not take that dream vacation that you always wanted to have when you got into retirement, because you exposed your money to unnecessary amounts of risk when it wasn’t needed.

Jag: Gotcha. So the core to having a really good investment strategy is to first know, and then have a good control over your expense plan. 

Michael: Yes. Begin with the end mind and have a purpose. A written down purpose for each step you’re taken. When we work with clients, we strive for them to be able to answer the why question behind every piece of their financial plan.

You have to know every piece of your personal puzzle and how it relates with all the other pieces. That is what having a plan, a comprehensive financial plan is all about.

Jag: And as you’ve mentioned before, Michael, build the plan and then you periodically review it so you can monitor it, make necessary changes as necessary.

And this will keep investors from panicking during, ahem, now. Rising expense times and market corrections. Now the Life Arc Plan system, we talked about it before. And also in previous episodes, it allows you to work in tandem with your clients. Communication. Of course, being key, taking action with the purpose is the right step forward.

We mentioned it before. You can take advantage of the Life Arc Plan for free on our website, artofwealthunbroken.com and Michael, give us the phone number. If our listeners would rather give you a call.

Michael: 855 378 1806. 855 378 1806. 

Jag: I learn something every week when I talk to you, Mike, and that discretionary versus non-discretionary and inflation versus non inflation expenses.

It’s nuance and it’s detail, but it’s really important to know when we don’t just live in a black and white world. Appreciate it. We’ll talk to you next week. 

Thank you, Jag.