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I am a lifelong DIY planner who has recently turned to Brownlee Wealth Management for some much-needed professional help. So, it was with interest that I listened to Justin and Jared’s insightful February podcast on Retirement Readiness, where they addressed key questions about how to know if you have enough assets to last a lifetime. After listening, I mentioned to Justin that one of the reasons that topic is so daunting to many people is that they don’t know where to start.
Planning without data is akin to taking off on a long-distance car ride without a map. It would be wonderful if we had Google Maps for our financial future. But we don’t. So, what can we do? Well, the very first step must be compiling and understanding your personal data.
I’ve always loved to keep track of things, so budgeting was never much of a chore for me. But I understand that it can be difficult for many people, if it gets done at all. So, I offer two recommendations: 1) keep it as simple as possible, especially at first, and 2) find the tool that is right for you.
I started my financial planning in 1990 with a simples spreadsheet when my wife and I were newly married. I tracked where we spent our money across multiple categories. We called it a “budget,” but we’ve never held too rigidly to it. The important thing was that we knew what was coming in and where it was going. It was also important to do it regularly because once you get behind it becomes a real chore to catch up. It was easy to collect the data once a month from our bank and credit card statements. I used a spreadsheet because it was easy to customize, easy to use and it was available back then. These days there are all kinds of apps that will help you track your money. Find what works for you, but the most important thing is to start.
Over the years, my expense tracking became more detailed. Now we use it primarily as a basis for projecting our spending across roughly 30 categories well into the future. In fact, we forecast each line item through retirement to age 95.
It wasn’t long before our simple expense budget became more complex but also much more useful. The planner in me realized how informative it would be if I started tracking more data and then integrating it into a tool to make dynamic projections.
The first place to start was to add income from our jobs, which was readily available from our paystubs. The difference between income and expenses we loosely tracked as “savings.” And that sufficed for a while - until “savings” became investments - and started throwing off meaningful income. Then I became interested in knowing how our savings was growing, what income we might expect from our investments and how are investments were allocated.
So, over time, I started tracking the additions and draws from investments, the returns that we earned and the resulting balances. It was easy enough to add this to my monthly exercise of updating our“budget” using our investment statements. Finally, with a little extra math, I could calculate our savings rate, net worth and other simple metrics to see how we were progressing financially. The basic data flows according to the chart below. Expenses and Net Wages (excluding deductions for tax advantaged plans like 401Ks, which flow to Tax Advantaged Investment Additions) flow through the checking account balance calculation. I know all cash flows are accounted for when the checking account on my spreadsheet equals what is in the bank at the end of the month. Of course, all households are different in how they handle money but this system has worked for us for 35 years
Over many years I have become a firm believer in the adage that “you get what you measure.”With a solid set of data it is pretty easy to make projections. I started out projecting 5 years ahead. Now I look 35 years ahead. I also calculate different metrics that help us sleep at night. It sounds more daunting than it is if you have good dynamic logic set up and stay disciplined in keeping your model updated. Of course, I know the projections are wrong. But I also know that they are reasonably close enough to allow my wife and I to make well-informed life plans and financial plans.
I’ll be the first to admit this has become a hobby for me. Each month, I now collect and calculate about 900 lines of data which equals over half a million cells in excel. I’m not suggesting you follow my lead to that extreme. But even a little data goes a long way in helping you and your advisor make solid sense of your financial picture.
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