Conscious Spending Plan

By | June 26, 2016

There are a lot of gurus out there that teaches you how to invest, how to save, and how to do a budget.  Well, obviously I’m not a financial guru.  I’m just an average guy trying to make ends meet and achieve my dream of financial freedom.  I do want to highlight one adviser whose advice on budgeting I’ve followed more than any other.  That person is Ramit Sethi.  He suggests having a conscious spending plan (guilt-free spending) and talks about how it’s different than budgeting as you’re used to.

wallet-669458_1280Before I talk about his method specifically, I do want to give an honorable mention to Dave Ramsey.  I have never purchased any of Dave Ramsey’s classes before.  So, my knowledge is limited to listening to the podcasts and what I’ve read online.  But, from what I can gather, Dave Ramsey’s zero based budget, if you can stick to it, is pretty good.  Basically, he uses an envelope system.  With his approach, you give every dollar a name at the beginning of the month before you spend it.  You create a budget and you stick to it.  With the envelope system, you have several categories.  Let’s say one of the categories is food.  You only use the money in the food envelop to buy food.  If another category is entertainment, then the money in that envelope is used for entertainment.  When the money is gone, it’s gone.  No more spending on impulse or buying on emotion.  The plan does take discipline, but if you can stick to it, it works.

However, while Dave Ramsey’s budgeting methods may work for some, I don’t believe they work for everyone.  I have a good grasp on what I spend money on and where the money goes.  Creating the budget isn’t so much the problem for me.  Sticking to the budget is the real problem.  Besides, I know myself.  It’s VERY HARD for me to create a budget for food, clothing, entertainment, because so much of my spending is based on how I’m feeling on any given day.  I know Dave Ramsey teaches more discipline, and I could learn a thing or two from those lessons, but I already know that his approach isn’t going to work for me at this time.

I subscribe to Ramit Sethi’s approach as described in his book, I Will Teach You To Be Rich.  Basically, Ramit teaches that as long as you have the important savings out of the way, you don’t have to worry about how you spend your money on a daily basis.  So, Ramit says that you shouldn’t worry about the Latte factor per se.  Let’s take Starbucks as an example.  I love going to Starbucks (even though I hate how expensive it is).  Ramit says, as long as I’m saving an adequate amount into a 401k (let’s say 10%), then the $5 here or there that I would be saving by not going to Starbucks shouldn’t matter that much.  Also, you can’t take human behavior out of the equation as it is unrealistic to deprive yourself of Starbucks because you’re likely not going to be saving that $5 over the next 15 to 30 years.  You’re probably going to eventually spend it on something else.  To some extent, I agree with this line of thinking.

I also like David Bach.  David Bach teaches several principles, one of which is to pay yourself first.  He also says to make your savings and investments automatic and he wrote about it in his book, The Automatic Millionaire.   All these gurus are good at what they do and they have a lot to offer.  But, because I don’t think one advice is always better than another, I’ve develop a modified approach that works for me and that combines some of Dave Ramsey’s ideas with Ramit Sethi’s approach taking into consideration David Bach’s principles.

Here is my approach:

PAY YOURSELF FIRST (David Bach)

  • You should pay yourself first.  As for me, all my fixed and variable expenses are taken care of with my income.  Ordinarily, I have a problem in that it’s difficult for me to save money.  If money is in my easily accessible checking account, I’m going to use it.  However, if I don’t see the money, then I won’t use it and I’ll even likely forget about it.  So, in order for me to pay myself first, money leaves my paycheck and goes into my 401k before I even see it in my checking account.  That approach has worked for me and maybe it can work for you too.
  • Another example is that I have automatic contributions to my IRA.  Now, although I don’t have a strict budget per se, I do have a spreadsheet that tracks all of my income and expenses.  If I make a purchase using my debit card at Starbucks, I’m recording it manually on my spreadsheet.  I do that on a regular basis, sometimes several times per week.  It does not feel like extra work for me because I actually like doing that.  It keeps me honest and keeps me knowing, TO THE PENNY, exactly how much money I have available to spend on any given day.
  • Perhaps more importantly, I treat my contributions to my IRA as an expense!!!  This is huge.  So, in my expense column, it is mandatory that I contribute to my IRA just as how it is mandatory that I pay my rent or electric bill.  Paying yourself first is a powerful idea and I encourage you all not to wait until the end of the month to see how much money you have left over to save.  Rather, I suggest, as does David Bach, that you save a portion of your income and then use the rest to pay your bills.  Even if you have to start saving at 1% and then gradually increase that amount, that’s a whole lot better than wondering where all your money went by the end of the month and not having any money to save.

DAILY BUDGET (Ramit Sethi – Modified Approach)

  • Because I have a difficult time figuring out how much money to spend on any singlemoney-rain category (food, entertainment, clothing, etc), I simply stopped trying to figure that out.  Instead, I figure out how much discretionary income I have to spend until my next pay check and then spend that money on ANYTHING I want.   So, let’s say I have $280 of discretionary income, and 14 days left to go before I get paid again.  Then I divide that $280 by 14 and I get to spend $20 per day.  That’s about what my budget allows at the moment.  I describe discretionary income as my take-home pay minus all my expenses.  Again, I include retirement savings as part of my expenses.
  • Being able to spend the money on anything I want is a freeing concept.  Having to stick to a strict budget seems very constraining to me and that kind of approach doesn’t work for me.  The difficult task for me is to balance the need to accomplish adequate savings, while making sure that I’m not ‘wasting’ too much money on a daily or weekly basis.  I think $20 is a reasonable compromise for now.  Once I improve the other areas of my life (such as food budget – mentioned below), this $20 amount might change.

ENVELOPE SYSTEM (Dave Ramsey – Modified Approach)post-1019770_640

  • So, following my example above, I use 14 envelopes, and write Monday, Tuesday, all the way to Sunday (for each week).  I then put one $20 bill in each of the 14 envelopes.  I also take my debit and credit cards out of my wallet.  That way, I am forced to spend cash.  Since I only have $20, I make sure it lasts me the whole day.  When I follow this approach, I control my spending, and reduce the amount of impulse purchases that have been so problematic for me in the past.

AREAS FOR IMPROVEMENT

No system is perfect, and believe me when I say that neither is mine.  One of the areas that I need improvement on is the food category.  I EAT OUT EVERY SINGLE DAY.  That’s a sad, but true statement.  I don’t cook – mostly because I don’t know how.  I could cook to save my life (I have done it in the past), but beyond making rice with a rice cooker (which I haven’t done in over a year) and ramon noodle soup, I’m not much of a cooker.  Instead, I eat Chinese food regularly and when I get tired of that, I go to Chipotle’s and sometimes Pizza Hut.  I usually get home from work pretty late, and so my nightly options for food are limited.  At least those options are a step up from McDonalds and other fast food restaurants.  Nothing against McDonalds if that’s your thing.

Another area I need improvement on is my weekend spending.  It is VERY HARD spending only $40 for the entire weekend.  So, I’m still struggling my way through figuring out a realistic spending budget for the weekend.  But, spending the $20 during the work week is far more manageable.

YOU CAN DO IT!

download-1002802_640Whatever system you use, or whatever approach you follow, just remember that you can do  it.  Don’t give up.  Keep on fighting the good fight.  To coin a phrase, the harder the battle, the sweeter the victory.  Financial freedom is worth the fight.

There are a multitude of sources you can learn from.  I happen to follow the conscious spending plan, but it’s not an all or nothing approach.  You don’t have to follow 100% of Dave Ramsey’s advice if it doesn’t work for you.  You don’t have to listen to everything Ramit Sethi teaches.  Pick and choose what you think might work for you and give it a try.  The destination of financial freedom might be the same for all of us, but the road we take to get there doesn’t have to be.

Good luck.

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