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CASE STUDY: Helping Lindsay and Esteban figure out their spending

By Beth Henary Watson

We have been doing retirement planning for many years here at Corner Post Financial Planning. One of the planning hiccups we see often is that individuals and couples have no idea how much money they spend.

When someone engages us to do a financial plan, we give them our Financial Planning Checklist, which is a list of documents to collect, goals to identify, and figures to report. While the checklist is just one page, the “average monthly spending” line may require a bit of legwork on the client’s part.

In this case study, we will walk through this piece of the financial planning process and discuss how critical nailing down your expenses actually is.

Meet Lindsay and Esteban Gonzalez.* They are each 58 years old and have entered into a financial planning agreement with us to see if they are on track to retire in 5 years. Esteban and Lindsay like their work but have seen friends laid off or forced to retire early due to health, so they just want to be as prepared as possible.

In our first meeting we ask them to approximate their monthly spending. Liz, who pays the bills, reports spending about $5,000 a month. We nevertheless ask the Gonzalez couple to complete our Household Expenses Template, a detailed spreadsheet designed to help trigger any forgotten budget items.

In our experience the average financial planning client initially under reports their spending, then comes to a more realistic number after completing a Household Expenses Template.

What Lindsay and Esteban discover after listing everything they spend is that their monthly bills are $5,000. This does not include food, gas, entertainment, and occasional purchases like clothing and gifts. Bills are typically fixed expenses like mortgage, taxes, insurance, vehicle payments, and utilities.

Equating bills with your total monthly spending is a common mistake when clients tell us from the get-go, “We can make it on $4,000 a month.”

Once the Gonzalezes add in dry cleaning, pest control, eating out, and generous donations to their church, plus those gas and grocery items, we arrive at an average monthly spend of $7,000, or $84,000 a year. This makes more sense to us as planners, since they report earning $110,000 per year from their W-2 jobs.

If you cannot rattle off your monthly budget with accuracy, you are not alone. A survey conducted earlier this year by the personal finance software company Mint found that 65 percent of people don’t know how much they spent last month—though many regretted how much they spent!

Once we know how much a client really spends, we can give better advice on such important questions as:

  • Is the current savings rate adequate?

  • What is the required rate of return?

  • What will the cost of living be in the future?

  • Will the client be able to reach their retirement goal?

Generating $7,000 a month in retirement spending takes a much larger nest egg than $5,000 does—several hundred thousand dollars more.

By sitting down, maybe for the first time, and looking at their spending, Lindsay and Esteban have identified the most important number in their whole financial plan: their monthly spending. Whether or not they are on track for their goal, as part of the planning process they will receive recommendations that are relevant to their individual situation.

* Couple is fictitious.


Related articles:

Retirement may cost more than you think

Case study: John, Becky, & the rising cost of living

Beth Henary Watson is a CERTIFIED FINANCIAL PLANNERTM at Corner Post Financial Planning. 


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 


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