In the last blog, I posted on budgeting, I wrote about the 50-30-20 framework for budgeting. This model has been life-changing for me in empowering me with the data I need to think about things like how much to spend on rent or groceries. However, it’s not realistic for many people. 20% is a lot to put away, especially if you haven’t historically saved much. This is especially true for people who live in high cost of living areas.
I used to live in the Bay Area. This is a world where Google interns, making $80k a year, are sleeping in parking lots because they can’t afford rent. To tell most people in this part of the country to save 20% is somewhat ludicrous.
The point of setting a budget is not to become so militaristic about your money as to make life miserable, it is to:
- Help with decision-making by lending clarity to limited resources. As Paula Pant says, you can afford anything… but not everything.
- Save money, the purpose of which is to create security and ideally, in the long run, wealth.
Here, I’d like to propose 3 alternative frameworks for those for whom the 50-30-20 model is unrealistic.
Re-Work the Percentages in 50-30-20
There’s value in categorizing where you put your money into needs, wants, and savings, even if those exact numbers aren’t correct.
For people in high cost of living areas like DC, San Francisco, or NYC, maybe the allocation is 70-25-5, or 80-18-2.
Find what works for you by starting with calculating your needs. You can then analyze your spending for the last 2-3 months to see how much you’re spending outside of needs. Again, don’t go overboard on cutting down wants. You still need to enjoy life. Maybe you find areas where you’re spending that don’t really bring you joy though – like the office cafeteria or the car you never actually drive because traffic is so gnarly.
Don’t Set a Budget
Another option is to just start saving and not crunch the numbers. If this is the model you adopt, I recommend starting small so you don’t send shock waves through your life and your bank account (or credit card balance).
Save 1% of your take-home this month. Next month, save 2%. Keep going until you feel constrained. That’s your wall, back-off of it by a percent or two and now you have your monthly savings rate.
Once you have that, run it through an online calculator to see where it will take you financially in the next 10,20,30 years. Will you have enough to meet your goals?
If the answer is yes, that’s awesome, keep going! If the answer is no, it might be time to reflect on either how much you spend or how much you earn. I realize that’s easy to write, but it’s not so easy to do. Unfortunately, with personal finance there are only two levers to pull in order to save more – spend less or earn more.
This is another iteration of the non-budget budget. Rather than creating a line-item spreadsheet of your spending or starting with saving, you start with spending.
The first step is to download the apps that are attached to your spending. This could be your credit card or your bank account but for most of us, it’s both or multiples of both.
Now just open the app every morning. What do you have, what have you used? Make choices accordingly and the night before your paycheck comes in, send any extra cash to savings.
The beauty of this model is in its flexibility. There’s no shame in having months where you can’t save. Maybe traveling to see family during the holidays eats up your extra money so December’s not your month. However, dry January makes for lots of nights in, and then you can make up for it.
This is also based on cold, hard science. There’s a concept called “pain of paying” in behavioral economics. Credit and debit cards, de-couple us from the pain of paying. Opening those apps every night brings it right back to the forefront. You may find yourself (like me!) automatically cutting down on expenditures just because you don’t want to see the charge to your card the next morning.
Saving something is always better than saving nothing. With that in mind, you never want to live under a budget model that pushes you to puritanical levels of monitoring your money – you have a life to lead today while you plan for tomorrow.
This can be especially acute when you are budgeting in a high cost of living area. Try one of the ideas recommended here and let me know how it goes for you!