4 walls of a spending plan
There is much chatter in the financial education industry related to how a spending plan should be put together – values based, broken out by percentage, pay yourself first, zero-dollar budget. I don’t want to add a different philosophy to the discussion, because frankly, all those approaches work. Right now, I want to provide some guidance on figuring out what is necessary for the ‘4 walls’ of your home to remain intact should something in your life change.
Every spending plan has categories indicating where our hard-earned cash is flying off to. Common items include food, utilities, or housing. What about childcare, self-funded health insurance, or college tuition? Every financial situation is different, but every household should know what items need to be accounted for if income changes. Let’s look at Nick and Rebecca. Household net monthly income is $5,500, and their current monthly expenses are outlined below. The couple meets with their financial coach to discuss a potential change in lifestyle because their monthly income would adjust to approximately $3,500 per month. Question: What line items are essential as they consider this change? Most people would say, ‘all.’ But that might not be the case.
The tally for Nick and Rebecca’s monthly household is: $5,235.00, but the actual amount to sustain the household is $4,080. Their ‘4 walls’ amount is quite a bit over their anticipated $3,500 income. See ‘before life change and considering life change’ columns. We would discuss a) potential timing for the change, b) desired goal in this transition, and c) appropriate planning for the change in resources and expenses.
Let’s say that the couple’s life change involves moving in with family to serve as caregivers. This change means they contribute to the household instead of being fully responsible unlike simply downsizing. For our caregiver example, let’s assume housing and utilities expenses decrease and groceries increase. Adjustment reflected in ‘after life change’ column. Other considerations are advantages and disadvantages of selling their car and alleviating the car payment? What is included in their credit card payments? Are they paying more to pay it off faster, or are those simply minimum payments? Modifications in either of those expenses impact their ‘4 walls’ and are fair game for discussion.
In either scenario, an emergency fund could be important to ease the transition for our couple. Despite the negative connotation of “emergency”, this pile of cash is a buffer between us and life. Rule of thumb is 3 - 6 months of necessary expenses saved. Set aside more or less depending on stability of income and projected use. If Nick and Rebecca want to make a life change in the next 12 months, then we can sit down and calculate their ‘4 walls’ and determine how many bricks are required for them to ease into the initial stage of their new life. Does that calculation cause a smidge of heartburn? Does that number require a temporary side hustle or utilizing available overtime at work? Or do they need to redefine what is absolutely necessary in their household? If the life change is immediate due to caregiving, we will follow the same process to work with what is available and plan with that timeline.
I encourage you to do the same. No matter the motivation, you can calculate what is needed to keep the walls intact to provide peace of mind. This exercise is particularly helpful if you have a family and dependents. It goes beyond cutting expenses to make more room in the budget to attack debt or save for retirement. It is understanding what is and isn’t necessary for a household to operate.
Final tip: review this calculation annually. Budgets change throughout the year because expenses are added and removed - think car payments and childcare. If you pay off your car loan, that obligation goes away, and if you have a sweet little nugget, you just added a lot to the budget. But most of the time they smell so good, so it’s worth it! Friends, break out your calculators and bank statements and get to math-ing. You heard me… 😊
Let’s start thinking! The 50/70/100 principle. What is the 50% uncomfortable, the 70% incremental and 100% vital that you can think about and do? If you want to talk about it, drop us a note at letstalk@studiomfinancial.net. Until we meet…keep working on the change.