Financial Wellness Guidelines-- Sufficient, Leisurely, and Abundant
To help readers get in alignment with their money, I’m doing a series I’m calling “Millennial Financial Wellness.” In this series of blog posts, I’ll be tackling some of the most frequently asked questions I get about money, money mindset, and more. Enjoy!
* Note, this piece was originally published on the now-closed website, The Middle Edit in January 2019*
In traditional psychotherapy, a large part of the work with clients is providing them with information on their diagnosis and symptoms. The fancy word for this is psychoeducation. What we know about providing psychoeducation is that it provides a client with the feeling of empowerment once they have an understanding of the various factors underlying their diagnosis or symptoms. For example, if I'm working with a client who is diagnosed with generalized anxiety, I'd share with them that common symptoms are feeling on edge, physically feeling hot or dizzy, and having excessive worrying thoughts. I'd also talk about ways to treat anxiety, including reframing anxious thoughts, practicing mindfulness or meditation, and regularly attending therapy. If I apply the idea of psychoeducation to financial therapy, it'd be something like psych-fin-education. As you can see, that doesn't roll off the tongue, so let's call it my Mind Money Balance financial guidelines.
The idea with these concepts is that these are general starting points or benchmarks when it comes to your money. I've created the following guidelines for my financial therapy clients, and I'm excited to share them with you.
Think about it this way. You wouldn't start on a college degree and hope you get one, you plan. You take a look at how many credits you need, which extracurriculars you wanted, and figure out how long it'll take. It's the same thing with money. If you hope you'll have enough or are saving the right amount but don't have any idea of what you need or what you have, you are taking a huge gamble!
I use a three-tiered approach for most of my financial guidelines; Sufficient, Leisurely, and Abundant. The first, Sufficient, implies that achieving this benchmark should provide a person with a sense of safety and security. This means the person can safely afford to pay for all of their monthly expenses, such as rent, food, clothing, and bills. For some, staying in the Sufficient tier is perfectly fine, whereas others like to use it to continue their journey towards the next level, Leisurely. This tier is Sufficient plus; you have enough, and you now have a bit more to help increase your sense of security. The Leisurely tier might include things like monthly facials or the ability to send your parents' dinner a couple of times a month. Finally, following the Leisurely tier comes Abundant. This is the tier where a person typically has enough to do everything they love and much more.
Emergency Fund
An emergency fund is exactly that; money set aside in case something comes up unexpectedly that is going to cost money. This isn't sexy; its cash that sits in plain-old savings account you can easily access if needed. This money is often used for a deductible if you get in a car accident, unexpected medical expenses, or a flight to visit an ailing relative. Everyone's definitions of what constitutes an emergency are different, though generally, anything you pay for on a semi-regular basis falls outside of this category. A killer sale at Anthropologie, lunch out with a friend visiting, and concert tickets to Beyonce are NOT emergencies. The baseline for what a person needs in their emergency fund is based on a month of expenses. As in "my emergency fund will cover me for one month if something happened to me." When I use the term expenses, I'm talking about things you have to spend money each month to survive. Rent, car payments, utilities, groceries, insurance, etc. are things that would fall into an expense category.
Spending Plan
I'm not a huge fan of the word budget; it sounds punitive and restrictive, like the word "diet." I prefer calling it a "spending plan" because it sounds more proactive and intentional. Feel free to use whatever term best suits you. Income is the amount of money you are bringing in each month. You could be getting money from your 9-5, your side hustle, child support, etc.
Monthly Income and Expenses
Anything you bring in is income. Expenses, as discussed above, are anything you spend money on. The great thing about a monthly spending plan is that you can spend on more than just the necessities needed to survive. This is where things like the NY Times Subscription, lattes, new clothes, and the like come into play. Saving for retirement, an anniversary trip, or a new couch would also be counted in your spending plan.
80/20 Rule
The 80/20 rule says that you can use 80% of your post-tax income towards needs and wants (housing, groceries, utilities, car loan, insurance, hobbies, travel, eating out, etc.) and 20% towards saving and debt repayment (retirement, student loans, etc.)
Sufficient, Leisurely and Abundant
As I mentioned above, these are the three tiers I teach in my financial therapy work. Each person or couple I work with needs to know what their sufficient lifestyle looks like, then they can dream about their leisurely and abundant lifestyles. Sufficient means you have enough money to cover your expenses each month. Leisurely covers those “nice to have” things, and Abundant is the tier that means you have more than enough coming in to cover a leisurely lifestyle and afford some cushy extras. Each person defines leisurely and abundant differently, as they should, as personal finance is personal.
Retirement
Why do you need to save for retirement? Because you don't want to run out of money in old age. There is almost no such thing as saving too much for retirement. There are many different ways to calculate what you'll need when you are no longer in the workforce. Factors that impact how much you'll need include where you'll retire (cost of living), your health, your age, how active you plan on being, if you plan on traveling, how much you plan to give to charity, whether or not you own a home or rent, etc.
Compound Interest
Earning or charging interest on top of an original balance. For example, you put $1,000 in a savings account that is paying you 1% interest. The interest is compounded once a year. What this means is that after a year, you'll have earned $10 in interest. When that year is up, and you leave your money in that same account, instead of earning 1% interest on $1,000, you'll earn 1% on $1,010 during the next year, or $10.10. Let's take a look at how that might work when you are saving for retirement. Say you invest $100/month in an account that is earning 7% interest. In 30 years, instead of a total of $36,000, you'd have $121,287.65! What if you put away $300 a month for 30 years with that same interest rate? You are looking at $363,862.95. The takeaway? Start saving in your retirement account NOW. Any amount helps, the more you can stash away, the more it will benefit you.
I’m a HUGE fan of examples. Concepts are great, but until I see them in action, it’s hard for me to wrap my mind around a lot of things. Let’s use an example of a very made-up person: Talia, a 29-year-old millennial, single in Grand Rapids, Michigan.
Expenses
Rent: $1,600
Groceries: $375
Utilities (electric, internet, water) $125
Cell: $85
Car Insurance: $150
Total Monthly Expenses: $2,335
Emergency Fund
Sufficient $1,200 saved (on average, the cost of an emergency in the United States)
Leisurely 1 month of expenses saved (For Talia, $2,335)
Abundant 3 months of expenses saved (For Talia, $7,005)
Extra Credit 8 months of expenses saved (For Talia, $18,680)
Income
Talia earns $65k in her job as a nurse manager, so after taxes, she is bringing home $4k each month. We already know her necessary expenses added up to $2,335.
How to use the 80/20 rule and Financial Wellness Tiers
Using the 80/20 rule, Talia can spend up to 80% of her income, or $3,200, and she is to save, invest, or pay off debt with the other $800.
$2,335-necessary expenses as outlined above (this would be her “sufficient” number, the amount of money she has to bring in to afford her monthly expenses). This means she has $865 each month that still falls into that 80% category and she could spend leisurely like . . .
$300 on entertainment (Netflix, dining out, books)
$200 gas and parking
$50 coffee and tea
$125 on clothes
$60 on an at-home workout streaming service
$50 on her cat
$80 towards a vacation fund
Now, if Talia wanted to get into the Abundant tier, and save $200 each month toward vacations, spoil her kitty with an extra $100 month worth of toys, or starts saving $600 each month toward a downpayment on her home, she needs to earn more money or spend less; ideally both.
Tell me, did seeing this financial wellness guideline help?
Resources:
This is part 1 in the Millennial Financial Wellness series. Read part 2 “How To Save, Spend, and Invest in Alignment with Your Values.”