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Spending Habits & Lifestyle Creep - Daviman Financial - Fiduciary Advisors Serving Indianapolis & Indiana
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Major life changes are frequently a trigger for changes in spending habits. Traditionally that has been associated with a change in work, marital status, or the number of people we are financially responsible for (increasing for births or decreasing for older children becoming independent). The many state ordered Stay-at-Home mandates have created a new type of spending shift that could create problems in the future. Here are three spending changes you will want to be aware of.

Increased Reoccurring Expenses

Let’s start with entertainment expenses. You can’t go to the movies. You can’t go to sporting events or concerts. You can’t meet friends for drinks. You can’t by adding subscription services. It is hard to imagine a better time to try out Netflix, Hulu, or Disney Plus given the amount of time we are spending at home. For reference, Disney Plus, which launched in November of 2019, reached 50 million subscribers in five months. They projected hitting 60 million subscribers in five YEARS!

There has been a similar trend in streaming music services like Spotify, buying services like Amazon Prime, fitness services like Peloton, and kid’s educational sites like Prodigy, EPIC, or ABC Mouse. They are easy to add because many cost less than $10 a month, however in aggregate they begin to add up.
In addition, a popular relief from eating at home has been getting carry-out or delivery meals at an increasing rate. A desire to avoid the grocery store combined with a search for variety has led many households to order food more frequently than before as part of a new weekly routine.

These new subscriptions and lifestyle changes have added significant reoccurring monthly expenses to households. Not to mention upgrades to internet speeds and equipment to support it all. Why are they so easy to add?

Temporary Reduction in Spending

Adding $20, or $50, or even $100 a month to spending right now might not even make you blink. In fact, for those lucky enough to maintain their income during this time, monthly expenses may seem to be decreasing. If you think of all of the discretionary things that we have forgone like movies, travel, and kids activities and add on all the things we are delaying like haircuts, auto repairs, and non-essential doctors appointments, our bank account might not be feeling the effects of our new spending we’ve added.

The problem with this observation is that many of our current reductions in spending are temporary. When was the last time you spent this little on gas? That means when the economy opens back up those expenses will hit our bottom line once again. Only this time they will be in addition to our newfound subscriptions not instead of. Before things return to normal make a list of any ongoing expenses you have added this year. Decide if you want to keep them and work it into your budget, or if they are temporary. Post the list somewhere you will remember to help ensure you cancel the services you don’t need.

Proactively Adjusting Your Budget

Once you have figured out what services you have added that you might want to keep, or eliminate moving forward, adjust your budget to match. The last thing you want to have in times of economic uncertainty is higher fixed monthly expenses.

Use this time to review existing reoccurring expenses to see if there are ways to reduce it. Large targets are refinancing a mortgage using low current rates, evaluating home and auto insurance premiums, and cell phone or internet plans.

One temporary change to prepare for is the funding of dependent care flexible spending accounts. Parents who were max funding these to cover daycare, or before and after school care, may no longer incur high enough expenses this year to use all the funds. These accounts (unlike HSAs) have a use it or lose it structure. Even though some plans allow a carry-over of up to $500 to use the following your, some may find they risk losing hundreds of dollars or more if they were targeting the $5,000 maximum contribution limit. Contact your benefits administrator to see what the rules are for changing your contribution amount outside of the open enrollment period. If you can afford to, consider shifting the contribution you would have made to your FSA temporarily to your 401(k), since they are both pretax contributions. Just remember to change it back at your next opportunity.

Know Where Your Money Goes

All three of these things to consider revolve around the central concept of knowing where your money goes. Even if you don’t like to budget into the future, understanding where your money is currently going today has tremendous benefit. Given the influence this current crisis has had on the monthly cash flow of most families, a detailed evaluation of how your spending has changed is necessary. That will give you the awareness, and knowledge, to come out of this period of economic uncertainty on solid ground.