Ballin' On A Budget
We all have that one friend whose lifestyle makes us at least somewhat envious, whose spending decisions make us stop and think “How does she afford all of that!?” This friend might go out several nights a week and order top shelf cocktails, while you order a can of Rainier. This friend might spend every other weekend jet setting off to a new city, while you can’t remember the last time you took a vacation. Whatever the circumstances may be, these friends, generally, have one thing in common. They have a conscious spending plan in place that allows them to spend freely on the things that make them happy and to cut costs mercilessly on the things that, to them, don’t matter. Behind all of the spending decisions that make you jealous, there are decisions that you don’t see. Maybe the friend who attends endless Happy Hours and nights out chooses to live in a tiny studio apartment in an old building with zero amenities. Maybe the friend who is always vacationing in a new city hasn’t bought a new item of clothing all year.
I want to enable all twenty-somethings to live the fun, fabulous and free spirited lives that they so desire. However, in order to do that, we all need to put in a little bit of work to create a plan that fits our lifestyles. Luckily, this work is somewhat fun and can be done in just one night, while sitting on the couch in pajamas, with a glass of wine and a guilty pleasure TV show on in the background.
It has taken me a lot of hard work, research, time and countless mistakes to develop a spending plan that works for me and fits my lifestyle. As I mentioned in my first blog post, most spending plans suggest obvious tips like “Skip Starbucks!” or “Bring lunch every day!” as the path to personal wealth. While focusing on small changes can make us feel like we are in control of our money and is definitely admirable, you have to remember that these small changes are just the tip of the iceberg, a Titanic-esque iceberg. There is no point in saving $15 a week at Starbucks if you are massively overpaying on rent, not contributing to retirement or making just the minimum payment on credit card bills. I did not find success with budgeting until I developed a plan that focused on the big picture and placed a huge emphasis on balance. I, for one, would have a hard time living a truly happy life if I allocated all of my extra money to my savings account, but had to decline every invitation to go out with friends. On the other hand, I would also be unhappy if I was unable to pay an unexpected medical bill or parking ticket because I hadn’t missed a Happy Hour all month. A happy life is all about balance!
I want to share with you the plan that has worked for me. As with all financial advice, it should be taken with a grain of salt and may not be the perfect fit for your lifestyle. Before reading any further about my spending plan, be sure to have your total monthly take home pay in front of you. We will get into the importance of retirement savings in a future post, but please please, PLEASE make sure that the number that you are working with is the amount paid to you after you have contributed, at least, what your company will match toward your 401(k). This is, absolutely, the most important step in any spending plan, especially for young people.
Without further ado, my conscious spending plan, the 20/50/30 method.
The 20: Your Future
Take a second to fantasize about your future, your dream life, if you will. In the short term, I fantasize about taking two nice vacations a year, one relaxing, one more adventurous. I fantasize about paying off my student loan, in full, and I fantasize about purchasing my dream handbag, the Chloe Marcie Satchel. In the long term, I fantasize about being able to pay for my future children to attend the college of their dreams and to retire in the comforts of my Napa Valley vineyard home. These are pretty large (aka expensive) dreams to have. This is where the 20 comes in.
A minimum of 20% of your take home pay should go toward your future. The future could include anything from emergency savings to debt repayment. As I mentioned earlier, I am all about balance and the big picture. It is entirely up to you how you choose to allocate this 20%. We all have different goals. The only non-negotiable about this 20% is that it be automatic. 20% of your paycheck should be directly deposited to an account that is not linked to your primary checking account. For those who have their entire paycheck deposited to one account, how many times have you said “I’ll transfer $300 to my savings account” only to walk by a cute pair of shoes and think, “Oh well, there’s always next month!”? We are all human and have impulsive tendencies, so do what you can to prevent this kind of behavior before it happens. Out of sight, out of mind is the motto when it comes to this 20%.
Some categories to which you could allocate this 20%:
- Emergency Fund - 3–6 months of net income; more if you are in a commissioned, freelance and/or unstable role
- Credit Card Debt - We will learn more about the best ways to prioritize and tackle your debt in future posts.
- Student Loan Debt
- Investments - Mutual Funds, Stocks, etc.
- Other Savings - Savings for any large goals that you have. This could include buying a house, paying for a wedding or taking an exotic vacation.
I would imagine that, for a majority of 20-somethings, this 20% would be allocated to a few different categories. The important thing is to make this 20% automatic and to do what fits your lifestyle and needs. Of course, you can always allocate more than 20%. This is just the bare minimum that should go toward your future.
The 50 : Your Essentials
While I might argue that my monthly Netflix subscription or Papyrus stationery obsession is absolutely essential, this Essentials category includes only the critical things that you need in order to live each month. Think home, food (groceries, not dinners out), utilities and transportation. That’s about it. We’re talking about the most basics of basics here. 50 percent is the magic, and maximum, number for essentials because it protects you from any curve balls. If you keep your essentials to just half your budget, you have a cushion to protect you if anything goes awry, such as taking a pay cut at work. Again, this 50% is big picture and all about balance. You can choose to allocate this 50% however you see fit for your lifestyle and needs. This 50% is especially forgiving to those of us who live in cities with highly inflated rent prices, such as San Francisco, New York and Seattle. Many financial experts preach that no more than 25% of your take home pay should go to rent. However, when you take into consideration that the average 1-bedroom apartment in Seattle is $1,412 a month, while the average post-grad salary is approximately $35,000, post-tax, the numbers just don’t add up. This 50% gives you the freedom to spend a little more than financial experts suggest on rent, if you can cut back on other essentials, like transportation. You might make the decision to live in a nicer apartment, but walk or bus to work. The point is that the choice is yours.
I have broken out my 50% as follows, but do what works best for you:
- Rent - 30%
- Utilities - 5%
Note: Utilities do not include Internet costs. While it may seem essential, Internet isn’t technically critical to your survival each month.
- Groceries - 10% (Again, this does not include eating out)
- Transportation - 0%. A few months ago, I made the decision to walk to and from work every day, even on the rainiest of days, and, in exchange, to contribute a little bit more to my investments.
Just like the 20%, be sure that this 50% is automatically deposited to a separate account that you will pay all of your essential bills from. Allocate the 50% however you see fit, but, just remember, this includes the bare necessities: housing, utilities, food and transportation.
The 30: Your Lifestyle
Last, but certainly, not least, the 30. This is my absolute favorite component of my spending plan because it is where all of the fun happens. We all work really hard and have earned the right to have a little bit of fun and to spend on the things that we are passionate about. Without guilt! However, when you break down the numbers, the 30 is still a limited amount of money, which means that it is critical to spend on where you notice it and on the things that truly bring you happiness. For example, if you are never home or rarely turn on the TV, don’t spend your 30 on premium cable.
As a minor shopaholic, I have always justified clothing purchases by cost per wear. For example, I could buy a $30 top from Forever 21, but, I might wear it just three times before either a) the shirt tears or b) I get sick of it. That would be a $10 cost for every time I wore the shirt. On the other hand, you might find a classic handbag that would run you $500, but that you would wear daily for 2 years. That would be less than $1 per wear. Yes, this is an extreme example, but I want you to think of the decisions that you make with your 30 in much the same way, cost per smile if you will. Spend where you care and cut back where you don’t.
As with the previous categories, spend your 30 on anything that your heart desires and do so without guilt. Once you have taken care of your essentials and your future savings goals, you can rest easily knowing that what remains in your bank account for the month is entirely yours to have fun with. Believe me, you more than deserve it!
Again, while this spending plan works well for me, it may not be the perfect fit for your lifestyle and needs. The important thing is simply to have a plan. Because, without a financial plan or road map, you cannot expect to achieve your financial goals.