I was recently reading a financial advice column – doesn’t that make me sound like a wild and crazy gal – and it gave that absolutely nutty advice that said something like “don’t get the latte every day, save on your $4/day for your future, and make coffee at home”. What? No delicious coffee?? For me, that may make life less worth living.
Let’s do the math real fast – $4/day…assume you do that 5 days/week 50 weeks out of the year, that’s $1000 each year. Here’s the question I wanna ask – if you’re struggling to have savings, or money to invest, is there something else you’re spending more than $1000/year on?? If you cut that BIGGER expense, that’s what makes a real difference. It feels a bit condescending to think coffee is keeping you from wealth. Coffee keeps me from insanity. It’s really about an overall approach to spending vs earning – THAT’s what you gotta think about!
When it comes to saving, there are a few priorities to think about. First, you totally should be contributing to your 401k, especially if your employer matches – that’s free money. If they match, say up to 3% of what you contribute, somebody wants to pay you if you save??? Take that money fool! Make sure you put aside that money – and time is your best friend when it comes to retirement saving, so take that free money from your company, and let it grow!! It gets so much compound interest over time – interest on top of interest – save it and forget it.
Next priority is to make sure you have an “I feel sane and safe fund” – which is to make sure if something happens to your income – you’re ok. Maybe you can’t take your job another minute, and want to quit, or they move pieces around and you’re laid off, or your mother gets sick and you need to leave work to help with care. You should have at least 3 months of your fixed living expenses – and I really feel safe at 6 mos. That way you have 3 months to breathe, and then some backup funding should you need it again, or decide you need 2 more weeks!
The breakdown generally of your spending is the 20/50/30 rule. Whatever your income is, 20% goes to saving, or retirement. 50% is fixed living expenses – stuff you have no choice in pay, and 30% is “fun living”!! Fun living expenses is coffee, vacations, shoes, dinners out, candles that smell nice, whatever you want.
So if you earn $3000/month (after taxes), then your fixed living costs is $1500, and the “fun spending” is another $900…so to save up 3 mos, you need to save at least $4500 ($1500 x 3 mos), and 6 months is $9000 ($1500 x 6 mos), and if your “fun” includes a daily latte, or fancy haircut, maybe you save some “fun spending” too, let’s add another $1800 ($900 fun x 2 mos). Each month you’re saving 20%, or $600, and some of that is probably your 401k, so it will probably take you about 2 years to build up your “I feel sane” fund. If you’re managing your money buckets with enough discipline for all that, go crazy!! Drink lattes, caramel macchiatos, frappacino, you do you.
It’s usually a lot easier to cut back on the BIG expenses to hit those 20/50/30 buckets. Did you spend $600 on a dress? What about telling yourself you deserve that vacation and spend $800/night on a fancy hotel? You were dying to do the Four Seasons instead of the local boutique hotel for $225/night? Did you spend $350 on a pair of shoes because they were Jimmy Choo? That’s where the splurges add up and put you past the 30% “fun spending” monthly. All the messages in our world target us with “you deserve it” spending, the luxurious things….but you get to fight back….what you really deserve is wealth, independence and retiring when YOU want. Controlling when and how YOU work. So pick your splurges with intent.
If you’re happy at work, spend it out, go for it, don’t save, you can keep working forever. We all know how rare that is, so you gotta plan for you. To get out of the grind, then the big decisions, make them thoughtfully. Can you find bargains in daily life, and set a budget that still lets you save but still spend on whatever is most important to you! Have whatever splurges you enjoy. Just have them in context!