Throughout our lives, we live in two interrelated financial modes: survival and lifestyle. As financial planners, when we talk about the survival mode, we don't mean living in the wilderness and hunting for food every day. Survival mode refers to mandatory expenses that must be met without exception, regardless of market conditions. Typically, these expenses include your grocery bill, mortgage, taxes, utilities, health insurance, and clothing. And with inflation, many of these expenses may increase over time.
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In your working life, your salary pays for survival expenses. When there is a surplus it funds your lifestyle expenses. Lifestyle expenses are enjoyable, fun, and negotiable. They include extras such as dining out, purchasing a new car every couple of years, vacations and travel, entertainment, a second home, and designer clothes. Keep in mind that survival and lifestyle expenses are relative, and can mean different things to people depending on their income and cash flow.
You've heard the phrase, "living beyond one's means" or "trying to keep up with the Joneses." These people may be incurring high lifestyle expenses, while not keeping up with their survival expenses. This typically results in very high credit card bills or home equity loans and, if not corrected, can be financially disastrous.
Understanding, budgeting, and planning for survival and lifestyle expenses is reasonably easy during your working years. However, once the steady salary stops and retirement begins it becomes crucial to establish a secure cash flow to cover your survival expenses—one that is independent of market activity. The financial crisis and recession occurred just three years ago. Retirees who did not have a secure cash flow to cover their survival expenses became highly anxious and predisposed to panic selling as they saw their nest eggs drop in value.
What can you do to ensure that your Survival expenses are covered? Set aside the assets you need to meet mandatory expenses in a low-risk account that offers stability of principal. Establish a second fund for lifestyle expenses that can be invested with a growth and income strategy. Remember, your lifestyle expenses are negotiable. They can be put on hold or minimized in a falling market to allow your investments to recover over time. Once you've secured your survival fund, rest assured that the absolutely necessary expenses in your life will be taken care of.
And for the extras? You can always take that trip to Paris next year!
Dean J. Catino , CFP®, CPRC, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service investment and wealth management firm. Monument Wealth Management is backed by LPL Financial, an independent broker-dealer and Registered Investment Advisor, member FINRA/SIPC. Monument Wealth Management has been featured in several national media sources over the past several years. Follow Dean and Monument Wealth Management on their blog Off The Wall , on Twitter at @MonumentWealth and @DeanJCatino, and on their Facebook page. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Strategies involving asset allocation and diversification do not ensure a profit or protect against a loss.