Op-ed: The Unlimited-Starbucks Budget
You can do all the situps you want, but without a healthy diet you will never end up with a six-pack. The same can be said for your finances: Without healthy spending habits you will never achieve financial independence. You may try to cut back on going out or go without lattes for a bit, but if you’re still spending too much on your housing, car, travel, and clothing, you may still find yourself falling off track to reaching your financial goals or, worse, in crushing debt.
Do you want to buy a house? Dreaming of traveling across Europe? Thinking about retiring early? You can do those things if you set your mind to it, but it may take a little work.
You may have heard that daily trip to Starbucks is what’s making your poor. No more Starbucks = problems solved, right? In reality, it’s more likely to be your bigger fixed expenses that are doing more damage to your bank account. Even if you ordered a fancy latte and some food every single day, that’s maybe $3,600 a year spent at Starbucks. By no means a small amount, but it's probably less than many of us should be saving toward our financial goals on a yearly basis.
Here are a few rules of thumb to get your spending in line, and get on track to reach you goals. Depending on your current financial situation you may need to work toward these allocations, but ideal spending looks like this:
Pay Yourself First: Save 20 percent of your income through retirement accounts, and other long-term savings goals.
Essential Purchases: 50 percent This is mostly your big fixed expenses like housing, utilities, transportation and other necessities.
Everything else: Spend 30 percent Travel, clothes, barhopping, or even Starbucks. (Pretty much all the fun stuff)
I know some of you may be adding up your big fixed expenses and may need to make some hard decisions to get your spending in line. How do your expenses compare to the ideal budget above? Can you really afford that car lease? Do you feel house poor? Are you drowning in credit card debt or student loans?
I often tell clients, “If you’re on track for your financial goals, I don’t care where you spend the rest.” If you have the money saved up to fly first class to Europe then by all means, pack your bags. But if you are in credit card debt, and not contributing to your 401(k), you might want to put that trip on hold, or at least see if you can save up some airline miles to pay for the flight.
DAVID RAE, CFP®, specializes in comprehensive financial planning for the LGBT community. He lives in Los Angeles with his fiancé and two Chihuahuas. Follow him on www.facebook.com/davidraecfp, on Twitter @davidraecfp or via his website, www.DavidRaeFP.com.
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