purpose for every dollar

Every dollar that comes into the household should have a purpose and an expiration date. This may sound controversial, and it’s probably the only thing where we often receive pushback from clients. However, assigning a purpose and an expiration date for every dollar serves multiple functions.

First, what do we mean when we say a purpose and an expiration date?

A purpose for every dollar

The purpose is where the dollar is going today. Examples would be a checking account for current lifestyle expenses, a goal account for a particular near-term goal, a savings account for one of your liquid account needs, or an investment account for long-term goals or wealth-building. Other examples could include paying down debt or setting funds aside for taxes. 

Each of these purposes has a target amount associated with it. For instance, lifestyle expenses may have an assumed amount of $10,000 per month, and those current expenses are paid first.  So, the first $10,000 each month goes to the checking account to fund those expenses. Beyond that, let’s say that you want to add $1000 to your vacation fund each month, $500 per month to top up your liquid funds, and $1,166 towards IRA accounts. The remainder will be used for wealth-building in your investment portfolio. The amounts were determined based on your spending plan, your vacation plan of spending about $12,000 each year on vacation, and replenishing your events and opportunities account after using it for concert tickets. The IRA amount is the maximum you can contribute. If you had additional goals, such as education funding or perhaps setting aside funds for a vacation house, those would be accounted for as well.

So, the first thing to note is that we’re not saying that each dollar has a purpose right down to the ultimate destination – like the grocery store or the hair salon – or even down to the specific category.  That comes from your spending plan.  We are simply designating funds for each purpose according to your priorities. This brings us to the ‘expiration date.’

An expiration date for every dollar

The expiration date is a guideline that forces us to go back and evaluate priorities. Here’s an example of what we see most often – the vacation fund. A family determines their annual vacation as a priority and establishes $10,000 annually for the anticipated cost. Let’s say the first year goes by, and $6,000 was spent from the vacation fund. The remaining $4,000 wasn’t spent because they couldn’t coordinate their calendars to take a longer vacation or a second vacation, so it stays in the account. The second year goes by, and, once again, they spend less than the $10,000 earmarked for vacation. 

At the end of the second year, the excess funds from the first year ‘expire.’ This means that we revisit the priority. Is the amount being earmarked for this goal excessive? Does the amount allocated need to be adjusted?  Or is it simply not the priority that we assessed when determining family priorities? 

Sometimes, we adjust the amount going forward. Other times, this discussion acts as a reminder that the funds are available and more effort is needed to plan and execute the vacation without feeling guilty for spending the money. Either way, the ‘expired’ excess $4000 from the first year gets re-purposed – most often to the wealth-building account.

A Purpose and Expiration for Every Dollar

Why do we do this?

The primary reason we use this method is because it helps people use their resources according to their values and goals. We often find that folks are reluctant to spend money on things that may have been out of reach in the past. This method helps ‘give permission’ to spend the funds because they have already been allocated to the purpose. Some of you are shaking your head because you can’t believe anyone has difficulty spending money, while others are nodding because you’re thinking, “Yup – that’s me!”

On the other hand, some folks need these guidelines to help balance spending. Overspending on one goal often means not reaching another goal.  Following the ‘purpose and expiration for every dollar’ philosophy, you cannot use funds from another purpose until they ‘expire’ without revisiting the entire plan. There’s nothing wrong with this; it just means acknowledging that either your priorities have changed or the dollar values assigned to them need to change. However, it does sometimes result in the realization that resources are too limited to meet all goals at the same time.

The purpose and expiration method also helps route out ‘false goals.’ False goals are goals that are set because of outside expectations. For instance, perhaps you set the $10,000 per year goal because that’s what your neighbor, friend, co-worker, or brother-in-law said is what they spend on vacation every year. Maybe you designated that amount because you really didn’t know what your ideal vacation would cost or because there was some subconscious keeping-up-with-the-Joneses going on. Either way, we can now take the opportunity to adjust the amount set aside so it is appropriate for the goal.

Additionally, this process can help indicate where we need to adjust the order of the distributions. Sometimes, it isn’t the amount that needs to be adjusted, but where and when in the list of priorities a particular goal falls. Lifestyle expenses are always the first category to be funded (including any current debt expenses), followed by any emergency fund replenishment. These categories are followed by your other goals in order of priority. Maybe the excess funds in your vacation account remain because you think you might want to cut back on the vacation expense now so you can reallocate those funds to speed up the purchase of a vacation home. You still want to take vacations, but we should push the vacation home purchase higher in the list of priorities and increase the regular funding amount for that goal while reducing the amounts going to others.

You’ll note in the example above that not all of the categories have a specific amount allocated to them; at least one category receives “the rest.”  The purpose for each is on your prioritized list. In other words, if your list looks like this on a monthly basis:

a purpose and expiration for every dollar

If your income in a given month is $21,000, then the boat and the wealth-building account won’t be funded in that month. On the other hand, if your income in a given month is $45,000, then all of your specific categories will be funded, and the remaining $23,250 will go to the investment portfolio.

One of the biggest benefits of this method is that it cuts back on decision fatigue and lessens the likelihood of making financial decisions that do not align with your values and goals. Making a decision after receiving a bonus or a windfall often results in less considered reactions or purchases that result in buyer’s remorse.  This method helps keep you on track for your long-term financial goals

This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.

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