Do’s and Don’ts When Tracking Your Financial Plan

February 29, 2024

On this episode of FIN LYT by EWA, Ben Ruttenberg and Stephanie Bogden on a deep dive into financial wellness focusing on distinguishing between productive and counterproductive financial tracking habits. Ben and Stephanie share insights into the practices that truly matter when it comes to tracking your financial journey. From the pitfalls of obsessing over a perfect credit score to the common mistake of tracking every single expense, they unravel the misconceptions that can derail your financial planning efforts.

Ben and Stephanie shed light on the constructive strategies that can lead to genuine financial health, including the benefits of reverse budgeting and understanding your debt-to-income ratio. By emphasizing the importance of measuring your net worth and adopting a strategic approach to savings, Ben and Stephanie guide listeners towards a path of financial clarity and confidence.
Beyond the numbers, the episode delves into the critical aspect of risk management, highlighting the significance of insurance and protective measures to safeguard your financial future.

With a blend of personal anecdotes and expert advice, this episode is a must-listen for anyone looking to refine their approach to financial planning and achieve a balanced financial life. Don’t miss out on their practical tips and the revelation of simple yet effective methods to track, manage, and protect your finances.

Episode Transcript

Welcome to EWA’s Finlit podcast. EWA is a fee only RAA based out of Pittsburgh, Pennsylvania. We hope all listeners of this podcast will benefit as we deep dive into complex financial topics that we will make simplified for you. And we hope that this really serves as a catalyst so that you can make the best financial planning decisions for your family and also save time them.

 

Welcome, everyone, to another episode of the Finlit podcast by EWA. My name is Ben. I’m joined here by Stephanie, and today we are going to talk about healthy and unhealthy ways to track a successful financial plan. Stephanie, I know I’ve met with a lot of clients that have a lot of different methods of tracking their financial health. Some of the methods are very productive and some aren’t as productive. So I think this is going to be a good kind of catch all podcast to help people identify good, productive ways that they can track their financial health from point a to point b.

 

Yeah, no thanks, Ben. I’m actually really excited about this one because I used to be like a chronic over tracker of things, and I thought I was doing myself like a favor by going through every line item of everything. And in reality, I finally come to grips with the fact that there’s really like a couple of things that are really the big indicators of whether or not our family is on track and things that are going to matter moving forward. So let’s dig right into it. I’m going to tee you up. What should we not track? Item number one?

 

Yeah, I’m going to say item number one is a perfect credit score. So an 850 credit score. Is it a bad thing to have an 850 credit score? No, but oftentimes I’ll run into people that will either put their financial plan on pause or wait on starting a financial plan until their credit score is 850. So just putting it all out there, not a ton of benefits, really, to having a perfect 850 credit score. There’s no product available loan credit card that are exclusive for people that have an 850 credit score. Generally speaking, anything above 770 will get a clean bill for a home, a car purchase, any sort of loan that you’re trying to take out. So.

 

Got it.

 

I wouldn’t sit here and say, like, put your financial plan on pause until you get an 850 credit score. I would build it up to a good and great level, but I wouldn’t necessarily strive for that perfect score at the risk offsetting other stuff.

 

No, I think that makes sense. I mean, we hear a lot of people say, like, oh, I’m going to go next year. I’m going to go apply for a large house loan. So I need to get my credit in shape. So I mean, basically what I’m hearing from you is a good high credit score is fantastic, but, like, overachieving to perfection doesn’t get you much extra. So put that out of your mind, out of sight. Sure.

 

And if you have an 850 credit score, that’s great.

 

Good for you.

 

I just wouldn’t sacrifice your financial plan or put things on pause to build up from 800 850, if that makes sense.

 

Agreed. No, absolutely. So I’d say item number two, I kind of alluded to in the beginning, which was tracking every expense and emphasis on every expense, because obviously you want to know that your mortgage, your car payment, things like that fit your income. Right. And you’re not overextending, but at the same time spending $20 here, getting a coffee out, going out to lunch, those are expenses that don’t necessarily. You shouldn’t be tracking those in a spreadsheet line by line. We’ll talk a little bit more about how we should track those, but doing that is going to be kind of putting emphasis on the little aspects of your plan that aren’t going to have the large impact.

 

Yeah, we’ve seen a lot of different budgeting systems in the five years that I’ve been a wealth advisor in front of clients. And I’ve often found, like, the best excel trackers aren’t necessarily the best financial planners. Just because you can write out every single expense that you incur in a month doesn’t mean that your plan is on track or that everything is in great shape.

 

Right.

 

This all comes back to controlling your money temperature. So having a handle on what’s actually coming in every month versus what’s going out equated to the temperature of your house, if you set it to a certain degree, ultimately you get used to it.

 

Right.

 

You might feel it at first, but then after a little while, you just kind of settle in. So same thing happens with money. And we’ll talk about healthy ways to track your cash flow in a little bit. But just because you’re writing out every single expense doesn’t mean that your financial plan is necessarily on track.

 

Right. You’re not doing a great job just because it’s on paper. Right. What’s number three, Ben? That we should not track.

 

Yeah, and maybe necessarily not track, but I wouldn’t say that visible assets aren’t necessarily a representation of financial health or that someone’s financial plan is on track. So if you see someone in a big fancy house or driving a really nice car, that’s great. But it doesn’t necessarily mean that their financial plan is completely on track. Sure, we run into people all the time that their monthly budget can get out of whack if their monthly house payment is too high. So one thing that we want to make sure that we are tracking is your monthly housing payment less than or equal to 30% of your net take home pay?

 

Okay.

 

When you think about your housing payment, that’s your mortgage payment, your homeowners insurance, your property taxes, all of those things combined got, you should be less than or equal to 30% of your net take home pay. That’s a really good barometer of, hey, am I in a house that is too expensive for me?

 

Sure.

 

Or would my financial plan be potentially stressed if there was something that needed to be done outside of the original cost of the house that could impact.

 

Yeah, no, I agree with that completely because we talked about this in a previous podcast also, which is those assets, like those big concrete assets like your home, you’re not watching that kind of go up and down like the daily market. Like if you’re watching the s and P 500, which you also should not do, and we’ll get into that, but year over year, if you’re paying your mortgage down or you’renting or whatnot, the actual value of that asset is going to be going up and down throughout the year, but you’re not seeing that every day. So trying to pinpoint like, okay, my house is worth this or my car is worth this on this date.

 

That’s just something that needs to be out of sight, out of mind, which I think kind of brings us to the last item that we’re going to say do not stress on a daily basis, which is the market in general, you’re going to have ups, you’re going to have downs. We’re going to have things happening globally speaking and within our country that’s going to affect the market. Don’t keep an eye on every single day, the level of the s, P, and then certainly do not benchmark like your daily, monthly or annual returns of your diversified portfolio to the S and P 500 or any other index, because they’re really not comparing apples and apples. And at the same time, it’s going to cause you a lot of undue stress to watch, fluctuations over the short term that will even out.

 

And actually, if you’re on the right financial plan in the long term, don’t have any impact on your future.

 

Yeah, that’s so true. And ultimately, someone’s financial plan could be in the context of 2030, 40, exactly 60 years.

 

Right.

 

So one year’s worth of market performance is ultimately going to be a blip in the radar in terms of your long term financial plan. And going back to what you said about tracking an index versus an overall diversified portfolio, I think that point is so important. It’s so easy to look at an S and P 500 return and say, oh, the S and P 500 returned 2020, 5%. My returns are ten to 15%. What happened? It’s important to think that the S and P 500 represents. I don’t want to go down a rabbit hole, but it’s the large cap index of an overall asset allocated portfolio. So that’s just one piece of the puzzle. You’re also going to have exposure to mid cap small cap international indexes.

 

Right.

 

Just because one index is higher than maybe what your diversified portfolio will be does not mean that in subsequent years or in future years, that index is always going to be higher than a portfolio. So it’s always important to make sure we don’t have all of our eggs in one basket. If we’re just tracking the S and P 500, we’re just tracking one segment of an overall pie that is going to fluctuate year over year. Whereas if you’re in a diversified portfolio that’s tracking many different indexes, you’re able to maximize your return while taking the least amount of risks.

 

Yeah, absolutely. I mean, in a month, a year, even of the market in general, up or down does not dictate the overall outcome of your financial plan. Long term. Ten plus years down the line doesn’t affect that at all. So let’s talk about, let’s flip it and say, actually, we said don’t track these things. What should we track instead? So what do we got, Ben?

 

Yeah, so let’s go back to the money temperature example for a second. So we have the wrong way to do it, which is tracking every expense on an excel sheet, month by month, of what you spent every month. A good way that we’ve kind of reverse engineered. This is a system called reverse budgeting, which is a really good way to organize your monthly cash flow. And it’s simple, super simple. So basically, you divide your monthly expenses into two separate categories. So the first category is your fixed expenses and your fixed savings.

 

Right.

 

So this is everything that you know is going out the door every month. This could be your mortgage payment, any insurance premiums, any debt payments, any savings to retirement accounts or education accounts, anything that you know is going out every month that should be set to basically one checking account and put on autodraft so that it is out of sight, out of mind. Your mortgage is paid, your insurance premiums are paid, your savings are being drafted. That’s out of sight, out of mind. That’s sent to a checking account. It’s on auto draft. You don’t even really pay attention to it just to make sure it’s taken care of.

 

Right.

 

So then the remainder of your pay is sent to a second checking account, which is almost, I think of it like a monthly allowance. It’s an allowance for people that can’t give themselves an allowance. It’s a guilt free account that you are able to essentially spend down to zero every month because, you know, in the back of your head, I can spend this because I know that everything else has been taken care of in the first account. So this variable account can be for dining out, your credit card bill, any charitable giving or gifts that you. Anything that you’re spending on a month to month basis, just swiping a card that will come from that second account.

 

And ultimately, that is meant to be spent down to zero every month because, you know, the very next month, it’s going to be replenished and the whole system repeats itself. So it’s a really good way to. We’re not tracking every time you swipe a card at a restaurant or you stop at Duncan for a coffee. It’s just a way to help organize your monthly cash flow in a way that you can spend guilt free. Because if this system is not in place, we often find clients that are either significantly overspending and they have no sense of where their money’s going. Money is going where it is, or we’ve seen the opposite, where people are significantly underspending because they’re hardwired to think, I need to save more.

 

And it’s our job as advisors to tell them, hey, give them permission to spend more because your plan is coordinated like this. So a system like this, if it’s properly set up and it’s maintained month to month, can be a really good way to help maintain your monthly cash flow and then not adjust to your money temperature. So if you increase your income, your lifestyle can either remain the same or be calibrated with this system.

 

Right. I think this is awesome, and I think everyone who’s implemented this finds that it’s really simple. I think two things that you said that really hit for me, which is like the fixed portion includes savings. Savings is not variable. So if you’re saying I’m going to save $1,000 a month, you’re going to save $1,000 a month. That doesn’t go down to 800 because you’re overspending in a variable expense. So really important that keeps your plan on track. So therefore, again, you should not feel guilty and you should go ahead and spend that variable account down. Do the things you love, enjoy your life, live your life by design. That’s what it’s there for. So I love that.

 

So that brings us to number two, which kind of circles back to the credit score conversation we started with, which is the debt to income ratio that you maintain, which is basically your overall debt payments on a monthly basis. What proportion of your total gross income on that same monthly basis is represented by that debt payment? So ideally, we want to see that be under 30%. And that’s like a healthy figure for making sure all of the other aspects of your budget and savings and such are covered. But that’s what lenders are really looking for. So outside of having the 850 credit score, this is one of the variables that will determine whether or not you can be approved for a mortgage, a car loan, other things of that sort, and whether or not your lender thinks you’re overextended in terms of budget.

 

So track this versus that perfect credit score.

 

Yeah, agreed. And that 30% number, that’s a general rule of thumb you could think about. It’s all going to depend on the type of debt that you have. If your debt to income ratio is 30% and you’re paying down a super low interest mortgage, creditors will say thumbs up. If 30% is on a variable credit card, personal loan or credit card, that looks different.

 

Exactly.

 

It’s important to understand which type of debt is being used in that ratio. But 30% is a good general rule of thumb to consider.

 

Perfect. What about number three?

 

Yeah, number three. Just an easy one to track is quite simply your net worth, all of your assets, less your liabilities. This is tried and true. I mean, this has been a healthy way to track your financial plan for centuries.

 

Now.

 

The easiest way to do it is understand where your assets are, where your liabilities are. That’ll help you determine your net worth. Quick example, if someone has $50,000 in cash, $500,000 in their investments and a million dollar home, and then 500,000 remaining on their mortgage, again, that’s 500,000 of liabilities. The rest being assets. So a million and 50,000 is their net worth in that example. And this is an easy way to track. Is this going up? Is this going down? Am I taking on too much debt? Are my assets growing at a rate that I want them to grow? Very easy to track. But also, it’s a really healthy measure of financial health, right?

 

Absolutely. I mean, you always want to be saving and then paying down liabilities if possible, and seeing that trend in the right direction, which is upward. Perfect. So we talked about things you should track, things you shouldn’t track. But now let’s talk very quickly about, we have all these measures in place. We have our financial. What, how does a client protect all of those things from the risks that are out there in life? So, Ben, you talk to a lot of clients. Let’s talk. Know what happens to a financial plan if they’re not properly protected and then the measures they should take to make sure things stay in place.

 

Yeah. You could be following all these strategies. You can be tracking your net worth. You could have a great debt to income ratio. You could have reverse budgeting set up, and everything is aligned perfectly. It’s going, and you’re doing all the right things. You’re financially healthy. But if you don’t have the right risk management policies in place, it could all be for nothing. Right. So when we look at defensive planning, that is, making sure that clients have the right amount and type of life insurance, the right amount of disability insurance, depending on their occupation or specialty, making sure they have health insurance, umbrella insurance, all of those things need to be put in place for someone’s financial plan to be protected.

 

Agreed.

 

Because ultimately, you could be doing all the right things. You could be invested the right way. You can have all the right principles in place. But if one hiccup from a risk management standpoint can throw your entire plan out the window. So this is really important. And a good measure of financial health is, are you protected from risks? Do you understand what risk management policies you have in place and are they right for you in your situation?

 

Right. I mean, I agree completely. And I also think it’s really important to be sure that you’revisiting these things, like, as your life progresses, as you get older, one of the things that you have when you’re young is the most valuable thing you have is your capability to earn and to work. Right? So you’re in your 20s or your 30s. Hopefully you have 30 years plus of work ahead of you, hopefully in a career that you love, but your earning potential and the years that you have, that’s like your greatest asset, right? Your human work capacity. So protecting that in the short term when you’re younger with disability coverage is imperative, and then those needs can change as you get older. Same thing with life coverage, like depending upon where you are with your family, your career, stage of life.

 

So I think we do a very good job of ensuring that we get that risk protection in place, but that we also reexamine it as our clients lives change. So that’s so important. So one last thing we wanted to talk about was just monitoring your savings rate as a percentage of your income. And I think you started to kind of segue into this a little bit, talking about money temperature, because one of the things that we find is as we start to earn more, do we start to spend more or do we start to save more? Is it a combination of the two? So always, as your income changes and hopefully goes upward, your savings rate should also increase, right?

 

Exactly. And this is an important thing to consider because it’s a percentage of your income. So it doesn’t matter if you’re bringing home 5000 a month or 50,000 a month, anywhere in between, your savings rate is going to be determined as a percentage of your income. So like in that example, someone is, let’s say you’re saving 2000 a month to your goals and you’re earning 5000 a month. Well, your savings rate is 40%. That’s a really healthy savings rate. You’re probably on track for your goals. If you’re 2000 a month saving, but you earn 50,000 a month, that’s not as on track. You’re saving the same dollar amount. But ultimately, that doesn’t mean that your plan is on track in the right way. So higher the savings rate, the better. We aim for 20% to 25% or higher.

 

Recommend, obviously, personalizing this to fit your financial goals. But, yeah, that’s a really healthy thing to track because it’s irrelevant of how much actual net dollars you’re bringing in. It’s based on a percentage. So you’re able to help calibrate that percentage based on your personal financial plan and your goals.

 

Yeah, I think that drives back to a little bit of lifestyle. And I’ve never ever heard a client, and you can correct me if I’m wrong, because you talk to more clients now than I do, but I’ve never heard anybody say they want to significantly downgrade their lifestyle when they retire. I hear that either you want to do more things or you want to at least maintain where you are now in terms of lifestyle. And the only way to make that happen is to make sure that those numbers are in line so that you’re saving enough to maintain your standard of living. And we know what you’re accustomed to, like pre retirement into retirement.

 

No, that’s super important. Basically, every plan we run, every client we sit down with, we try to maintain the same standard of living that you’re used to now, just because it’s easy to think, hey, I’ll be retired, I won’t be doing much. But we’ll run an exercise with clients that will basically assess how they spend their 24 hours in a day.

 

That’s so interesting. I love when we talk about this because it is like light bulb moment, right?

 

Light bulb moment. Maybe you sleep 8 hours, maybe you work another 8 hours and you have 8 hours of free time in your day to day life now. Well, let’s fast forward to retirement or financial independence. You’re still doing your 8 hours of sleep, but now you have 16 hours of free time. So are you going to spend less money? Are you going to sit around more often than not, people are going to find a way to spend money with that extra 8 hours of free time that was previously worked.

 

And you want to have the freedom to do that.

 

You want to have the freedom to do that. Exactly. And the way to do that is to track a financial plan the right way from the start so that you have the peace of mind knowing that, hey, I’ve done this the right way. I can live the life that I want by design because I was able to take the right steps down the road.

 

Right? No, I love it. I think these are all like super great points and hopefully our listeners took one or two, maybe more away from this. So, anything else to add before we wrap up?

 

No, I think if you have any questions about how you’re tracking your financial plan, I do suggest reaching out to an advisor to get a personalized plan in place that fits your goals. Make sure that your investments are allocated based on what is important to.

 

And we have quite a few videos actually out as well. So on our website, on our YouTube channel for Ewa and Finlit by Ewa regarding how to create that reverse budget, some pointers as know money temperature and so forth. So definitely check those out if you haven’t and tune to our next episode next week.

 

Thanks for tuning in to our podcast. Hopefully you found this helpful. Really hope this is as beneficial and impactful to as many people across the nation as possible. So hit the follow button. Make sure to rate the podcast and please share with any friends or family members that would also find this beneficial. Thank you very much.

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