What comes first: the vacation or the bill?
Having worked in business management and personal finance for over 20 years, I see a common pattern that often gets people into financial trouble. This pattern is what I refer to as “spend too much” or “earn too little” problems. This post is specifically geared towards the former.
These types of clients tend to create their lifestyle and then figure out how to pay for it. I hear families say all the time, “well, we had to have a house big enough for three kids,” or, “ we had to put our kids in private school because the public schools were not an option.” They also tend to say things like, “I can’t find any less expensive places to live in Los Angeles,” or “this is the going rate for a nanny!” or “I just need the convenience of having food and everything else delivered to my door.” My favorite is, “I needed to have a Range Rover because I really want to make sure I’m in a safe car.”
You get the gist. Before they know it, these people have created a hamster wheel situation, and the inevitable race begins to try and keep it moving fast enough to avoid major debt.
So many people create a lifestyle based upon their gross income. This is mistake #1. They need to see exactly how much they’re going to take home after taxes, set aside between 5-20% for savings, and then they can start to create a lifestyle based around what money remains. Maybe they will have to stay in a rented apartment for longer, or perhaps their children will have to stay in the public school and parents can supplement with tutors or online courses (which are still a lot less expensive than private school tuition).
When clients come to me because they aren’t saving any money and they are slowly getting into debt, it is rarely one expense that is pushing them over the edge. Rather, everything is slightly inflated: their rent or car payments are high, they’re eating out too much, and things like travel, shopping, and other discretionary spending are far out of proportion with respect to their income.
Some couples will say, “I need a vacation! So I’m going to Hawaii – but I can’t get there for under $10,000 for a week.” I tell them to reverse engineer the approach: see how much you can afford on a vacation, and then determine where and how you can travel to have the most enjoyable experience while staying within budget. Perhaps instead of flying to Hawaii you can drive to San Diego or one another beautiful coastline in California. People forget that sometimes what they really need out of a vacation – time with family, great food, beautiful sceneries, opportunities for relaxation – are far less expensive than they make them out to be.
The problem with the common “book then figure out the finances” approach to vacations is that it becomes almost impossible for this group of over-spenders to set aside enough money for the “what if” or “bump in the road.” If you talk to anyone over the age of 40, I’m sure they will tell you of at least one or many bumps they have faced that they weren’t planning for financially.
I like to remind clients that humans have basic needs, and coach them on how to differentiate between a need and a want. To that I also say, even with our needs – take food, for example – there is the option of having a peanut butter sandwich every day, having filet mignon every day, and plenty of meals that lie in between those two extremes.
With respect to vacations, there is the stay-at-home option, The Four Seasons in Maui, and a whole lot of opportunities for incredible experiences are more middle ground – and will hurt a lot less on the tail end of the vacation.
We have to change people’s mindset so they learn from an early age that saving is just as important and, in some ways, can be even more relaxing than a vacation. Knowing that your future is stable and secure is one of the best ways to achieve peace of mind, experience less stress, and create more meaningful time with your family.
That being said, taking time away can be a wonderful way to decompress and make memories, too; people just need to make sure they aren’t taking vacations that will leave them more stressed than anything because of lack of vacation budgeting and overspending as a result.
If you’re needing some financial planning assistance of your own, or are interested in better understanding your own patterns around money, please reach out!
