The opportunity cost of budget busters

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DamonCarrBox

Most of us have heard the often-repeated phrase regarding money—“It’s not how much you make but what you do with what you make that matters.” All of us who are of sound mind and who are able-bodied workers have the opportunity to amass a sizable nest egg by the time we retire. Yet 96 percent of Americans age 65 and older retire or die BROKE and 85 percent of Americans have a true net worth that equates to less than a measly $250. These gut wrenching statistics include people of all income levels. It amazes me that most of us will retire or die broke when you consider the African-American woman who washed clothes by hand for a living, earning a very modest income who somehow some way managed to save hundreds of thousands of dollars. This woman who had no children and no heirs decided to award college scholarships to aspiring students of various Black colleges.

Then there’s the parking attendant who managed to scrape, save, and pay 100-percent cash for all three of his children’s college education. These are ordinary people who made extraordinary progress toward reaching their financial goals while earning an income that’s achievable to all of us. How can these two people make such a financial quantum leap while the majority of us—96 out of 100 to be exact—will retire penniless hoping that social security and/or our loved ones will somehow, someway provide for us during our golden years? The great separation can be attributed to the obvious fact that these two individuals had their priorities in line. They identified some financial goals that were important to them. They formulated a plan to reach their goal and consistently saved money to meet that goal. They kept their spending under control and despite the constant curve balls that life threw them, they never wavered from what they were striving for.

Time tells all. Financially speaking, I view retirement and/or death as the day of reckoning. This is a time where it’s easy to see how money has been managed over the years. Jesus says that where your treasure is there your heart will be also. You can tell what’s important to a person by reviewing what they spent money on or saved for. If most of us will retire or die broke, we can say that saving for retirement or leaving something behind for our heirs in the event of an untimely death has taken a back seat to something that appeared to be more important to us. It could be that we thought that the chance of death or retirement happening was in the distant future. As a result, although we knew it was important, there were other things we wanted to address before we focus on distant future planning. Life comes at your fast! Before you know it years have past and what was the distant future is now the present. Yet our planning never caught up to the time. The time has come when our loved ones whom we left behind wonder, “Oh where oh where has the money we worked for all these years gone.”

So many of us dread the idea of having a budget, thinking a budget restricts us from doing what we want to do. In reality the amount of money you make or the lack thereof is what will restrict you. A budget is nothing more than a spending, saving, and investment plan telling your money where to go instead of wondering where it went. Most people fail financially because of over spending, no savings and no financial game plan. When you don’t have a spending, saving and investment plan in place the things that you spend money on that may seem insignificant is the very thing that’s holding you back from reaching extraordinary financial goals. I refer to these things as budget busters. Budget busters are motivated by bad habits, false hope, and lavish living.

Case in point: I recently provided financial counseling for a 45-year-old woman. She wanted to start saving for retirement but found it difficult to consistently save an amount that will grow to a respectable size by the time she retired. After doing a cash-flow analysis, we identified among other things that she was spending roughly $800 per month dining out. To be fair she had done a good job managing her money owning a car and one of her two homes free and clear. She also had relatively low balances on credit cards. Naturally the $800 per month dining out tab caught my attention. It was something she enjoyed doing with her teenage children who will be off to college soon. By not having a spending, saving and investment plan, she did not realize that this mother and children retreat that was saving time in the kitchen and allowing her family to bond was costing $800 per month. I then introduced her to a financial planning concept called opportunity cost. This concept helps people to understand that by doing one thing with money you in effect lose the opportunity to do another thing with that particular amount of money. In my financial planning report I wrote: (Food for thought) Did you know that if you invested the $800 per month each and every month for the next 25-years at an average rate of return of 10 percent instead of dinning out, your investment would be worth $1,061,466.72? (Better be some good food.)

Dinning out may not be your budget buster and you may not be spending as much as $800. But I have providing financial counseling for others whose financial goals were going up in smoke spending as much as $600 per month on cig­a­rettes. People who have bet away their retirement spending $500 per month on the lottery. People who were snacking on their nest egg day-by-day spending up to $20 per day ($400 per month) during work buying coffee, donuts, chips, juice, breakfast and lunch. What is your budget buster costing you?

(Damon is the owner of ACE Financial. He can be reached at 412-856-1183.)

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