When The Equation Fails
THE EQUATION
For the last two weeks, we have been breaking down the budgeting (wallet-hacking) equation. Here it is again to refresh your memory:
+ Get your paycheck (might have some long term savings withdrawn automatically to 401k, etc.)
– Automatically send short, medium and long term savings goals to appropriate accounts
– Pay your fixed expenses (rent/mortgage, utilities, groceries, etc.)
= Whatever is leftover is yours to spend on whatever you choose (discretionary component).
We also dug into the short term savings component, which includes your emergency reserve and allocations for any substantial, infrequent expenses. This brings us to the final two categories—fixed expenses and what is left over.
(If you’re wondering, medium and long term savings will be addressed in future posts when we discuss different types of investments and retirement accounts).
THE PROBLEM
A question I often get in response to this equation is, “what if your short-term savings rate and your fixed expenses eat into your ‘left over’ amount to the point where you have nothing left?” If that’s the case, there’s likely a larger problem to address.
THE SOLUTION
Most likely, your fixed expenses are too high in relation to your overall earnings. Typical “budgeting” principals say that you should spend:
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About 50% on your “essential expenses” (rent/mortgage, utilities, groceries, gas, etc.).
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20% should go to “paying yourself first”. These are items that move you financially forward (short, medium, and long term savings, paying off credit cards and debt, etc.).
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Then, there should be about 30% left over for you to spend on whatever you want.
From what I see, this equation rarely adds up. If you live in Denver or other places with high cost of living, your essentials category can eat up SO much of your take home income. How do you then prioritize savings and fun if you have 70% going to living essentials? Typically, the savings piece is dropped and 30% is still going to your “fun” spending.
There is a balance we must find between having fun today, while also “sacrificing” some fun today for fun later on (aka saving money). However, we all naturally want to have more fun TODAY, because of course, we are Millennials and we want immediate gratification (haha). However, I would venture to say that, Millennials or not, who doesn’t want to be able to have more fun today?!
Sometimes, the term “savings” feels like you’re having to give up so much fun today and it’s almost obligatory. If your brain feels that you’re having to sacrifice too much, you just won’t do it.
REFRAME YOUR SAVINGS
So, number one, we must reframe our brain’s view of “savings”. You are still getting to keep the money! It’s still yours. It’s just going somewhere where you cannot touch it for a little while (aka delayed gratification). What if we changed the term “savings” into “tomorrow’s fun money”? Wouldn’t that make it seem much more appealing and rewarding? I’d say so. And number two, whether you believe it or not, “tomorrow’s fun money” is the most important part of the equation. This is where you can start to build true wealth, feel secure in your financial grounding, and start doing more meaningful things with your money.
We cannot neglect this over any other category.
It is NOT what you make in income that is important. It is what you keep for yourself and your future that is the MOST important. Having a long, sustainable and FUN life really comes in the wealth that you create for yourself.
If your “essential expenses” are eating into your income so much that you are stressed about your spending, consider this: How could you lower your “essential expenses”? What would that look like?
When we graduate college, it seems like it’s so cool to have a fancy apartment with a pool and granite counter tops, get a nice car, go to nicer meals, etc. Because, why not?! I have a job! I make money! Woo hoo!
I recently went from paying over $1,500 per month for a one bedroom apartment in downtown Denver to paying about $750 per month with a roommate in a neighborhood just outside of Denver. The decrease in the amount of “money stress” that I have every month is not even explainable.
I thought I would miss living downtown, but the decrease in the amount of stress is more valuable to my overall I’m not saying that it will be feasible for everyone to cut their rent in half by any means. But I would urge you to consider looking at your “fixed” expenses. The lower those can be, the more room you can create for yourself to have fun TODAY (spending) and TOMORROW (savings).
Sometimes we have to learn the hard way, and that’s ok. I definitely have! But it’s never too soon (or too late) to reevaluate what you are obligated to spend money on every month. If your lease is coming up on your apartment or your car, perhaps reevaluate the value in having lower monthly expenses. Even a couple hundred dollars a month can make a big difference.
Think about what you really enjoy spending money on. What brings you the most long lasting satisfaction? I’m not sure I’ve ever heard anyone answer with “rent”, so without judgment of yourself or any decisions you have made, look over a few things this week:
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Break down all of your essential expenses by line item and then add it all up to find what you’re having to spend on a monthly basis.
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This should include: rent/mortgage, utilities, gasoline, groceries, etc.
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With fun and savings aside, what does it cost you just to live right now?
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Of your take home income, what percentage are you spending on those essential expenses?
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If it’s under 50%, awesome! Obviously, the lower the better in this category, but you’re doing pretty well if you’re under 50%.
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If it’s over 50%, go through each line item on your list.
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Are there items where you can take action to save some money? Could you lower your rent when your lease is up, do you need the top cable package, do you use all the groceries that you buy, etc.
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Whether or not you are above or below 50%, make a general list of what you enjoy spending money on that brings you long-lasting satisfaction.
Liked this blog? It was written by WalletGyde’s new financial mindset coach, Jordan Youngblade! Her philosophy is it’s not always about having MORE money – it’s about how you view and use your money. She will completely transform your money and LIFE through her process! Stay tuned, she will be sharing her expertise all month!
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Jordan Youngblade
Jordan Youngblade is a Colorado native and attended the University of Colorado at Boulder where she studied finance, economics, and international business. She has always been curious about money and how we interact with it! After graduating from CU, Jordan pursued a career in financial advising for an independent firm. She did that for 4 years and had a successful start to her career with that company and took home several awards. In that time, she built a business from the ground up working with several hundreds of individuals and business owners. In the final year that she spent as a financial planner, Jordan began to really question how money and happiness were correlated. No matter how much money she or her clients had, there always seemed to be something missing! It seemed that no one ever seemed to believe that they had enough and it led overall to some unfulfillment. She also began to notice her own financial trends - making a great income for someone in their early 20's - and she had no idea where all her money was going and for what purpose. She had big dreams and her life no longer seemed to be aligning with where she ultimately wanted to go. On a quest to solve her own problems around money and unfulfillment, Jordan began her own journey in personal development and fell in love. Learning about mindset, psychology, and the emotional side of money, life and business began to steal her attention away from financial planning. She discovered some fascinating answers that she HAD to share with the world and decided to leave in late 2016 to start her own company! Now, Jordan is a full-time Money Mindset Mentor and Coach and is wildly passionate about helping others change their mindset and understand their own personal psychology when it comes to money so that they can live out their dream lives! It's not always about having MORE money - it's about how you view and use your money. She will completely transform your money and LIFE through her process!
