This is Part 3 of the Budgeting Series. See Part 2 here.
Budgeting has a way of being intrusive.
You can find out a lot about a person by looking at their spending habits and how they budget their spending. As a financial planner, I have to identify areas of excessive spending in people's budgets and look for ways to save them money. The catch is this: identifying problem areas in one's budget is easy, but executing the cuts or adjustments are hard.
I liken it to the show "Hoarders". These people know they have a problem, but once others start touching their stuff, they start spazzing out!
Are there untouchables in your budget?
I didn't know personal finance was so controversial. But it is. See this article about avocado toast. The headline from The Guardian reads like this:
"Millionaire tells millennials: if you want a house, stop buying avocado toast"
I noticed these responses from fellow millennials on twitter:
— Miranda Rawson (@mirandarrawson) May 29, 2017
— Eryn Pimentel (@erynCA) May 30, 2017
— Malcolm Wilson (@MalcolmWilson01) May 31, 2017
Needless to say, millennials are not too pleased about this criticism of their spending.
A Minimalist Approach to Budgeting
Have you heard of the 50/30/20 budget? The concept behind the budget is this: 50% is for essentials, 30% is for personal and 20% is for savings.
However, I would make it even simpler: 50% for essentials and 50% for personals.
Budgeting for personals are where things get a little touchy. This is because your spending on personals reflects your values and priorities. You might think that your subscription to Netflix or Equinox is essential and you wouldn’t dare cut it out of your budget.
My List of Personals
For the purposes of this approach, I have listed items in the personals category. Again, I am assuming you do save but your savings rate may be 2% or it may be 30%. So some kind of savings is assumed here, but your savings percentage is up to you depending on your context. With that said, lets get into the "personals".
This category includes things like cable, sports tickets, or your monthly Spotify bill. Basically, its anything that you do for fun. Some people even lump in eating-out in this category. Eating-out can be nuanced though.
For example, if you worked in an industry where you didn't have consistent access to a refrigerator, microwave or storage (for bagged lunch), you would have to eat out everyday for lunch. The industry that comes to mind is management consulting. From what I know, management consultants travel a lot and they don't have offices. Rather, they have what is known as "landing stations". Their office is their laptop. In this case, eating out would be in the essential category.
This category could be considered by many as the hot-button issue in today's society. Ask any parent about their perspective on education spending and I am sure you will get strong opinions. I am a parent of two girls (2 year old and a new born) and I am already starting to think about what we are going to do for high school.
Actually, the decision is pretty easy for my family. I can't afford the top private schools in NYC (Dalton one of the top private schools in the city is $44K a year). So my daughters have either get a scholarship or go to public school.
But lets say you were wealthy enough to have options: private or public. Which one do you choose? One is free and one is not. Either way the decision has significant implications for your wallet.
Obviously, having an education is essential but where and how much you spend is not. Financially speaking, there is a big difference between paying for a top ranked private liberal arts college and a no name in-state university.
Also, there is no need to go into how much student loans have burdened millennials ( 'cause I could write a book on that). Also, let's not forget those who by pass college entirely and go into the workforce.
Many would say internet is essential. I agree that it is borderline, but I would argue that if you have a smartphone, you already have access to the internet. In a financial emergency you could cut your cable for a month and be fine. I had a who friend did this for a couple of months. When he needed to print or scan something, he would go to the local print shop. It is definitely not preferable, but you would survive if you had to do it.
Services & miscellaneous
I would lump all other discretionary spending in this category. Things included in this category would be: beauty & personal care, gym memberships, investments, etc. This is where things get real personal.
Personal care could be anything from spa treatments to getting your shoes shined before work. Items in this category could also range from adding a little money to your 401(k) each month to day trading as you drink your morning coffee.
For me, one item in my Services & Miscellaneous category is the group of fees that are related to maintaining this website totaling to around $20 a month. I don't have an issue with it because it makes up a small portion of the budget.
Unfortunately, for some people, the "miscellaneous" category is a bigger percentage of their budget than it needs to be.
Personally, I believe that you should have somewhere in your budget that gives room for generousity. In my book "Money Proverbs", I talk about about how giving is good for the soul. Giving in itself doesn't make financial sense, but at some point in your financial journey you will come to realize that life is not about the money.
I know in my own life, through people's generosity, I was able to achieve things I only dreamed was possible. I have seen first hand how generosity creates possibility for others. Being the agent of transformation in someone's life is priceless. I am sure those who give have the most fulfillment in life. Money can buy a lot of things, but it can't buy fulfillment.
How do you approach "personals" (aka non-essentials)?