In the interest of full disclosure, I have to confess that the word “budget” and I have seldom been on speaking terms. Throughout my marriage, my husband would intermittently try to produce a budget for us, usually when we were considering a major purchase like a new home. Occasionally he tried to get me involved, but I always resisted the process. And thankfully, from my point of view at the time, he always ran out of steam after a few weeks of effort.
In my mind, a budget was associated with those guilt-inducing articles written by financial planners. They usually appeared in the newspaper back in the day, and now you can find plenty of that rehashed/recycled advice on the web.
I called it the “Luxe-Latte Formulation,” and it went something like this: The reason you can’t save any money is because you stop at a coffee shop on your way to work every day and buy a premium latte with lots of add-ins. If you gave up coffee and invested that $15 per week (1990’s prices) at an average return of 12% per year (1990’s market performance), in 20 years you’d have saved $59,300.
It eventually occurred to me that one reason I resisted budgeting is that it felt too much like dieting.
Whether we’re looking at the money spent or the calories consumed, what the experts failed to take into account is the fact that the quality of my day relies heavily on whether or not I am able to purchase my favorite cup of coffee. If I'm banned from buying it, I can almost guarantee that I will arrive at work feeling depressed, deprived, and disagreeable.
More importantly, those planners never told me how much money I could afford to spend on my caffeine indulgence.
Why, I wondered, can’t the financial pros take a progressive approach to money in the same way nutritionists have to food? The medical experts no longer talk about diets; they talk about “healthy eating plans.” This shifts the focus from short-term deprivation to a long-term way of living, and it allows me to have that latte (with skim milk, of course) as part of a sensible eating strategy.
A couple of years ago I happily stumbled upon a budget model that takes that approach. It was created by Harvard professor and newly appointed Senate seat holder Elizabeth Warren, and it tells me how much I can afford for my morning coffee as well as all the other areas of spending.
So why do I want to share this model with you since I survived without a budget for quite some time? Here’s why – the last 10 to 12 years have demonstrated a few unpleasant trends:
- Jobs are much less secure, even for those of us in the public sector
- If we keep our jobs, things that reduce take-home pay such as furlough days, wage freezes, and increases in what we pay for health insurance are more common
- College education costs for our children are growing much faster than incomes
- Retirement readiness has become a bigger challenge, regardless of the type of plan we have in place
Given the changes to our economic environment, a “healthy spending plan” makes a lot of sense.
Keep in mind that it’s best to start working on this plan when your financial situation is relatively stable. If you’re struggling with unemployment, no health insurance, or a mountain of credit card debt, you may need to go on a financial diet (there, I said it) for a while before you transition to the long-term strategy. Once you’re following this approach, you’ll be better positioned to deal with any future setbacks you encounter in today’s reality.
The 50/30/20 plan starts with your net pay and provides guidelines for the percentages you should be spending in each of three broad categories. Read more about the 50/30/20 Budget Fix here.