How You Can Get Financially Organized
Day 3 - Tre George's story can teach us something
All Subscribers: I am sharing this updated post with my students. We are early in our semester, and the academic timing coincides with many new followers and subscribers to Personal Finance Economics. I hope you enjoy it.
His office door still read “Tristan George, III, General Surgery” when Tre left the doctor’s medical complex in Birmingham on his final day of practice.
July 21, 2022, was one of those 90-degree days in Birmingham when it felt like 110. Who’d want to wear a coat and tie? Tre George is a proud Southerner of multi-generational descent, and one more day in his plaid suit and bow tie was how he wanted to leave his career. When not in scrubs, it was how he dressed.
Seventy years old, healthy, and fit, Tre entered his mostly empty office early this Thursday. He brought along some Starbucks and a small flask of whiskey with the intention of being reflective. It's better to mourn that way. Marsha Sue, his wife of 41 years, had died two years ago. He was now alone to celebrate the end of his work life.
Sadness temporarily at bay, Tre sent a text to his investment guy, Jimmy Park, who runs money out of his San Francisco wealth management office after a stint at Goldman. “We need to talk,” Jimmy called him. Tre trusts Jimmy and, now retired, plans on Jimmy to help make his retired life easy. That was the plan. No index funds or Malkiel guidance from Jimmy. “I can beat the market, he told Tre.” As a reader of Personal Finance Economics, you know that is very unlikely.
Nest Egg is Stinky
Fast forward to January of this year. Tre is resting at an Airbnb on St. Simons Island, GA, but is distressed. Tre’s plans to move permanently to a sister Golden Isle, Sea Island, are on hold. Jimmy didn’t beat the market. The valuation of Tre’s retirement accounts dropped 30%. Now, Tre thinks his temporary 6-month home rental will end without an extension to more permanent digs. “Too expensive to live among PGA stars and Davis Love, III,” Tre reports.
But, is Tre’s life-changing response post-Jimmy’s investment advice pre-mature? Markets change. Economics change. Bank stocks may be involved. Life is short. Still, Tre has begun to adjust his spending downward, an intuitive move, with no idea how to measure the benefits of a slowdown in spending. Tre finds himself a price shopper on those thrice weekly visits to Piggly Wiggly. “Retired” means Tre is foregoing any future human capital, but he could measure the longer-term living standard impact with economic tools and planning techniques that would offer Tre an informed target for his spending, one built on the entirety of his financial condition, his longevity, social security benefits, taxation, estate planning, expected inflation, and so forth. Tre needs a financial planner who understands economics.
Tre’s response to a down market is broader than a retiree attempting to manage the balance of their life.
“What can I afford?” Don’t most of us share this thought?
Like every household, Tre’s happiness depends on the accuracy of an answer to this question. Tre needs to know how his expenses add up and compare them to his best living standard expense path. No more conjecture.
Know Today’s Expenses
How do your expenses total up? The question is simple and complicated. It is simple to think of a few of them. It is complicated to get all the categories and then make an accurate assessment of their amounts.
A spreadsheet template can help with the task. (Below is one from Chapter 1 of Economics-Based Personal Finance.) Yes, categorizing how you burn money is time well spent, but it has a more important implication.
Unless you know how you spend today, how can you assess how you need to change your spending behavior to reach the goal of obtaining your highest living standard?
It is a question common among those who feel the need for financial planning but don’t know where to start. Addressing the optimal living standard is not yet intertwined into the vernacular of the investment community because advisors are in the investment community. It is much more appealing to sell expected investment returns with the normal disclaimer about risk than to have a tete-a-tete about how risk-return trade-offs will affect a client’s quantity of living standard. By the way, if you are a new subscriber you should know it is possible to be precise on this point.1
Housing as an Example
Consider housing. You might rent or own. The spend is obviously different. How can we think about actual monthly spending attributed to only the “roof over your head?” Consider a snapshot from the template in the table below with the blue arrows tracing to amounts to consider. For the renter, basic apartment rent, preferred parking, amenity fees, and renter’s insurance capture the basics. For the owner, a few more items have to be tabulated. You get the gist of the approach. Utilities come later.
Whether a subscriber or Tre George, the thought of tabulating expenses is usually back-burnered quickly because it is hard to know where to start. The template helps because it queues the mind and then automatically sums up common expenses very quickly. It is time-tested and has been used in my classes for years with input from others.
Just a Tre-ace of Detail Needed
For instance, here is the listing of the monthly Food and Dining, Entertainment, Insurance, and Utilities sub-categories,
If you happen to use Monarch to organize your expenses, then you have a source for tracking down your transactions and placing them within the Excel workbook. If not, a view of bank and credit card statements for a specific month with a calculator handy will get you on your way to tabulating a monthly set of expenses for placement in your workbook.
Summing Up
Lines 1 through 9 in the table below show the roll-up of the more granular list of expenses from the table above into categories for one financial planning client. The template automates this process to create the Actual Spending Totals table below. The penultimate step in an economics-based financial plan is how this actual, annual figure (line 10) compares to the best-derived living standard. The final step is a client’s implementation.
Would this approach help Tre?
Even if Tre doesn’t use economics-based financial planning principles to optimize his spending, I bet he will experience serious anxiety reduction from knowing more about his spending. Knowing more about his spending will allow him to roughly assess a portfolio that is 70% of its pre-retirement value, giving him a clearer mind to enjoy his morning biscuits and cheese grits.
Send me an email, robert@finplanllc.net, if you want to know how.
Hi! I found this setup extremely useful in class and thought it was well introduced. I know personally I'm a more visual learner so being able to adapt information into charts instead of only reading or hearing it was incredibly helpful. It was also a great way for me to better understand expenses, assets, and consumption as a whole! Well done :)
Hi, how did you able to upload a file to download? I tried with a PDF, and in Substack is not posible any more. Thanks in advance.