abacus personal finance – Abacus Fitness and Money

Needs, Save, Want Budget Format (revised)

Everyone likes a quick simplification of something that otherwise requires a lot of thinking. A “rule of thumb”.

When it comes to planning what to do with your money, odd are that you’ve likely heard some recommendations floating around in articles, podcasts, videos, and the occasional blog post. Some of these recommendations are:

Save at least 10% of your income
Invest 15% of your income for retirement
Pay yourself first
50/30/20 rule (Spend 50% on needs, spend 30% on wants, and save 20%)
Track your spending
Don’t buy fancy coffee
Automate your savings
Wait 7 days before buying anything
Follow a budget
Have an emergency fund
Don’t have an emergency fund, use credit cards or a HELOC
And plenty more

Photo by **Suzy Hazelwood** from **Pexels**

Turns out we need a rule of thumb to cut through the rules of thumb.

One of the more popular rules is the 50/30/20 budget. I want to destroy the rule. Here’s why.

Despite what I assume were good intentions when someone devised the 50/30/20 rule and the likely good intentions of everyone since then who have repeated it, I sincerely doubt it’s efficacy in the real world. In reality, saving 20% of your take home pay to cover everything from a rainy day or big purchase to retirement investments is not enough.

More importantly, justifying the expenditure of 30% of your pay on “wants” because it fits in an easily repeatable saying like 50/30/20 is in my opinion only serving to enable wasting money. Somehow many of the big voices in media only suggest investing 15% of our income. At that rate of saving, you would need to continue for 51 years before you could retire and have enough invested to cover your costs of living! 51 years! Reference this article by the infamous Mr. Money Moustache to see the math behind this claim:

Mr Money Mustache article

Even if you started diligently following that advice at age 20, that means you have a 51 year career ahead of you! Better not relax and take your foot off the gas! Plan a wonderful 71st birthday party because that’s how old you will be when you can finally retire! MADNESS. I don’t know what your hopes and dreams are around working and retirement, but even a foggy and ill-defined view into my future doesn’t show a 71 year old Brendan hard at work at the same full time job!

Even if you somehow had enough cash savings to allocate all of the recommended 20% of the 50/30/20 rule directly to investments, it would STILL take 37 years to replace your average spending with investment income! This is believed to be “not bad” considering most people start working in their early 20’s and the retirement age is people’s early 60’s. But why is retirement age all the way into our 60’s? Because the government sets those dates for penalty-free withdrawals from our tax-advantaged retirement accounts? Or because it’s impossible to do otherwise? To be honest I have no idea. It feels like surrender to just accept 4 decades of work to one day have hope of achieving “work optional” status. This is something we need to force to change at a grassroots level.

My baseline proposal is to flip the 50/30/20 rule around and recommend spending 50% of income on needs, 20% or less on wants, and 30+% to save and invest.

My baseline proposal is to flip the 50/30/20 rule around and recommend spending 50% of income on needs, 20% or less on wants, and 30+% to save and invest. To regularly save cash for future purchases or to replenish an emergency fund that’s been tapped, we have to create a margin. 5-10% of income going to cash savings is likely needed to save for that next car, that home renovation project, that vacation, or a similar expense. These kinds of things are foreseeable, predictable, and are therefore “save-for-able”. Having the cash to pay for these kinds of things keeps us out of debt and in the long run easily saves tens of thousands of dollars. The fact that a large purchase is always around the corner means that we should perpetually be saving cash for these kinds of events. You can either make payments to yourself interest free or you can make payments to a lender and get absolutely destroyed by interest. I choose the former.

The common practice of taking out a home equity line of credit or second mortgage to pay for a big project or other expense seems especially appealing in 2020 because interest rates for this kind of loan are at record low levels. I am with you in feeling this temptation. I even called our mortgage broker to discuss refinancing to take advantage of these incredibly low rates. But the response I got back was basically, “Your rate is already so low and your mortgage balance is also so low, that I won’t write the loan and the banks likely won’t be interested in it.” Translation: we can’t make enough money off of you so we’ll move on to someone else who WILL make us a lot of money. (No hard feelings on the broker, the guy has to eat.) This is somehow a compliment and a rejection at the same time. Because we took out a 15-year mortgage 4 years and 1 month ago, we’ve aggressively paid down the principle on the loan. That’s just the way a 15 year mortgage works. In the same 4 year period we would have paid off far less of the loan balance and far more toward interest (i.e. making the banks richer) had we opted for the far more common 30 year mortgage. Anyway, all that to say, the only way the banks would be interested in allowing us to refinance would be if we did a massive 6-figure cash-out refinance to do something like fund a home renovation project. As a result they would make many thousands of dollars on us, just because we wanted it now and would not wait and do the same work over a period of years.

The other extraordinarily common way to get what we want RIGHT NOW is just to put it on a credit card. It’s truly amazing how common this is and how common it is for people to carry a balance on their credit cards. The average American carries $5,700 in credit card debt. The average interest rate on credit cards in America is about 17%. If someone with this “average” situation pays $150 per month on their credit card, it would take them 55 months to pay off the balance! Almost 5 years! That would also mean they paid an extra $2,541 in interest! That’s 44.6% more than that stuff should have cost! Those $200 earbuds? They actually cost $289. That $1100 phone? It actually cost $1590! And this is all assuming the credit card spending stopped and no additional charges were made! Most of us keep using the cards for the next emergency or the next impulse buy! The amount of money that credit card companies profit from our lack of saving and impulse control is truly staggering and depressing. Let’s just say it’s in the hundreds of billions of dollars. (In 2016 it was about $163 billion and odds are that number has only risen).

Especially if someone is already in debt using some of these methods (which aren’t even the worst or most predatory kinds of debt available), allocating at least 5-10% of all income to save and/or use for debt repayment is crucial. In fact, as part of the new 50/30/20 rule I’m proposing here, I think if someone has high interest debt, which I would classify as anything above 6%, the vast majority of that 30% number allocated toward saving and investing should be spent on debt repayment. If you are losing money at a high rate, you won’t dig yourself out of the hole by investing and hoping to earn it back at an even higher rate. Paying off that credit card balance that’s costing/losing you 20% interest is triage. Stop the bleeding! Until then, postpone investing and get the wounds stopped.

Paying off that credit card balance that’s costing/losing you 20% interest is triage.

After paying off that high interest debt, let’s say you’re saving that 30% total, with 5-10% of that going into a high yield savings account or CD ladder. You’re preparing for future expenses both expected and unexpected! Bazinga! You will avoid the debt woes mentioned above and will have ample cash saved. I agree with recommendations to have about 6 months of living expenses in cash, more if you have greater volatility in income levels or spending levels. I.e. you are paid on commission alone and have variable medical expenses etc… Or even if you just want to be prepared for anything and not have to think about going back into debt, having a larger cash emergency fund available is great.

The traditional 50/30/20 budget is oriented much more toward immediate satisfaction than my proposed swap. Planning to spend 80% of your money makes sense in the moment because there are SO many things to buy and so little money to buy them. I think it also serves to make people feel better about “only” saving and/or investing 20% when they could actually do considerably more if they set their mind to it. For higher earners or people with simpler lifestyles, it’s a relatively low bar. In my suggested 50/20/30 budget, spending 70% (or less) and saving or investing the other 30+% positions a persons finances with a hugely increased level of security and future hope.

The remaining 20-25% of that 30% total left after saving in cash should be allocated to investing. The reality is that many people are forced into involuntary retirement through job changes or medical challenges. Perhaps your company closes and you aren’t able to find a similar job in another company. Maybe you’re injured and can’t perform the physical duties your job called for. There are any number of ways this happens. Sometimes it’s not even something that happens to you specifically, but a choice you feel is right. Taking care of someone close to you make become a higher priority than work. Being financially secure could allow you to stop working or cut down the amount of work greatly to care for them. Only investing a small amount now does not allow those transitions to happen with any degree of smoothness.

But the fact is that over 47% of Americans aren’t investing at all, let alone to the degree recommended above. And less than 20% of Americans are saving for retirement specifically in 401k or IRA accounts. Since the 401k and IRA are tax-advantaged accounts and are the most popular ways to save for retirement, we can postulate that the vast majority of people simply aren’t prioritizing their retirement.

But the fact is that over 47% of Americans aren’t investing at all, let alone to the degree recommended above.

Looking at this issue objectively, I completely understand why this is the case. The realities of today and the next month are pressing. Retirement happening someday feels like an eternity away. It is both distant and vague. We know what we need this week to pay bills, buy a new fun thing, or eat at our favorite restaurant. We don’t know exactly what we need or even when we will need it in terms of retirement savings. Human nature is to focus more on the immediate payoff, so we do. And this is one of the main reasons (in my opinion) why we are in dire circumstances when it comes to most people’s personal finance situation and especially in the case of retirement savings.

Part of my motivation to both do this and encourage other people to do this is the potential for something to happen between now and “retirement age” that knocks us off our feet. I’ve known people personally and read numerous stories online about otherwise healthy, active, relatively young people being struck down with cancer, covid, accidents, or other unexpected events. These are catastrophic financially because not only is that person not working, but their partner is likely working less or not at all to take care of them and to top it all off, they are racking up obscene medical bills along the way! This is not a commentary on the American healthcare system, but we all know how crazy expensive these bills can be. No one has died, and in fact the expectation is for a slow but full recovery. Let’s look at a hypothetical example:

Let’s say you’ve been working on this flipped 50/20/30 plan for 10 years. You started at age 35 and now you’re 45. You have paid off your debt with the exception of your mortgage and have 7 months of living expenses saved in cash as an emergency fund. You also have $5,500 saved for a home repair you expect to happen in the next year. Solid work! Not only that, but you’ve been investing 25% of your income every year for the last 10 years and the occasional small pay raise at work has helped create quite a nice nest egg between your tax advantaged retirement accounts and a taxable brokerage account you opened on the side. The retirement accounts have about $125,000 in them total and the taxable brokerage account has about $20,000. Out of nowhere, you feel a tightness in your chest on the way to work. You make it there but walk inside only to feel worse. You call 911 and are taken to the hospital when you find out you’ve had a very mild heart attack. The doctors recommend spending 3 nights in the hospital for monitoring and tests then taking at least a month off work. During the second night, you have more chest pain and have yet another heart attack! The doctors rush you to surgery and implant a stint. You end up spending a total of 4 nights in the hospital.

After that you’ll likely need regular checkups and daily medication to mitigate future problems. As a result you end up missing over a month of work, have $11,300 in medical bills, and now pay $267 per month for the prescription medication. Your old financial self would have been crushed by this. Missing over a month of income alone would have pushed you to visit the dealer of debt known as “credit card”, let alone the huge medical bills and increased living expense of the medications. You would have been paying off the balance of the new debts for years. Instead, you dip into your emergency fund to pay bills while you are away from work. It’s annoying but not a stress-inducing exercise. Then you negotiate a bit with the medical billing people and find out that not only can they reduce the cost of the bills by $1100 down to $10,200, but they can also break up the cost into an interest free 6 month payment plan for you. Nice. You use the cash in your emergency fund and the $5,500 earmarked for home repairs to fairly easily pay off the entire balance in the 6 months. You end up with 2.5 months of living expenses remaining in cash in your high yield savings account and begin to quickly replenish it now that the bills are paid. Your credit card remains at a $0 balance since it wasn’t needed. Before long, you’ve gotten the cash savings back up to the previous levels and didn’t even need to touch the money you had invested, but knew if you needed to you could pull the $20k out of the taxable account at a moments notice. The biggest difference throughout the whole scenario was your lack of stress brought on by the financial burden of this. You had a plan and were not very burdened at all. This left you with more mental and emotional bandwidth to focus on your physical health and recovery. Quite the win-win!

This is the kind of real life in-between scenario that I expect to happen to many if not most of us. The point of saving and investing far more than is common isn’t to “get rich” or even to have a plush retirement. Despite current popularity in early retirement, I would argue it’s not even about that! (Though the potential of work becoming optional before all of my hair turns grey does sound pretty awesome.) It’s about the peace of mind all along the way. Getting away from the regular stress of debt and cash shortages along with a total lack of preparation for the future is priceless. It frees us up to spend more of our limited time and attention on the people around us. It prevents big nasty financial catastrophes when unexpected costly events unfold. It prepares the generation after us to change the “norm” to something much better. Our kids watch us, including what stresses us out and what causes fights. Let’s pave a new road toward financial security and health for ourselves and for them!

Motivation predicts everything

How can you advance your career in a matter of weeks or months with a mindset change? Especially if you’re a millennial like me? I’ll share my shameful but effective learning process with you to save you the time and trouble!

No this isn’t some silly fru-fru “I believe I can fly” positive self reinforcement B.S. But your mindset is very important and plays a major role in how you progress in your career and how successful you are in general.

I’ve recently experienced a massive shift in my mentality around work and motivation and it’s made a huge impact on my success therein.

My story: I’m in my early 30’s and have been working in the construction management industry for about 8 years. Before that I spent a few years in a retail management position and before that dabbled in sales. I’ve never been terribly successful professionally, until recently when I made this shift in my mentality.

I grew up as one of those kids who is naturally inclined at most things. Good grades, excelling at sports, making friends, etc… all came without much struggle. Being a millennial, whatever proficiency I displayed was always reinforced by participation ribbons, pats on the back and encouraging words. PLUS I grew up in a small town, so there was less competition. I was the “Valedictorian” of my junior high class of 27 students. Not a major accomplishment compared to a normal sized school!

To be honest I never thought about the incessant positive reinforcement we all got growing up but it inevitably shaped the way I thought. That environment reinforced the belief in myself that (you may also share) “you SHOULD be successful at the things you do”…basically always. But that expectation has a very limited lifetime and once you enter the real world of a career, it comes crashing down.

So as I entered the workforce it’s not that I wasn’t adding value or doing well, it’s that I was bringing less to the table that I thought I was. I was expecting a level of proficiency, and the associated rewards only reserved for those with levels of commitment and experience far greater than mine.

But that was a lesson I only learned through shame. Let me tell you that story:

A little over a year ago I got called into the boss’s office. I had been working on construction sites for the last 5 years, so getting an ambiguous meeting scheduled meant only 1 thing: promotion time! I had been doing a great job, was managing construction projects really well, no one had been seriously injured on my projects, they generally finished on time ( I even finished a project 2 weeks early!), and there could be no other real reason for a legitimate meeting except to formally announce that my career was going to the “next level”.

Orrrr so I thought.

I sat down with a smile, and readied myself for the big news. BUT instead of a shower of compliments and a new job title or bloated salary I got vaguely negative feedback. Something about how “I hadn’t arrived yet” and “wasn’t quite there”. Not that I had been doing a bad job, I was actually doing a good job, but it was definitely not “great”. It didn’t make sense to me….I zoned out trying to grasp what was happening….

Finally, the realization set in that this was going nowhere good. And even with clarifying questions I still didn’t really grasp where my performance wasn’t going well or how I could improve. In fact I began to get angry. Really angry. Not only did I not expect this but the least they could do is be direct! What does that even mean to “not arrive yet” or not quite be “there”?! Where the heck is “there”?

I reacted. Poorly.

I told my 2 bosses how hard I’d worked and how intentional I was. That my methods were probably the best way that the job could be done! I explained that this job wasn’t even a good fit for me. We’d talked about that in the past. About how it’s not very well suited to my strengths and they knew that. It was a blur. A frustrated, sweaty, tense, blur. I may have yelled. (Actually if you can’t remember whether or not you yelled, you probably yelled.)

I yelled.

This was a small office. Maybe 10’x15’. We were very close to each other. An arm’s length away. So my yelling was right in their faces.

To this day, to this very moment I can picture their surprised and disappointed facial expressions toward me. I can close my eyes and see them. Finally the meeting ended and I trudged out.

At the time the company needed building maintenance done so I was stuck doing manual labor for weeks afterward. Everyday I climbed up ladders and did roofing repairs. First, sweeping and pressure washing to clean them, then patching obvious holes, repairing and reattaching metal parapet cap material, then finally re-coating the entire roof surface before moving onto the next building and repeating the process. Alone with my thoughts… chewing…grinding…writhing alone on those rooftops with the boss’s feedback swirling around in my head. FURIOUSLY replaying those conversations in my head. Thinking about all the things I could have said. All the rebuttals I should have made.

While roofing, I was passing the time listening to audiobooks. (Using the free Libby app through the public library system, which is awesome by the way) Business books, leadership books, entrepreneurial books, autobiographies of successful people, etc…. Hearing these people tell stories of overcoming their surroundings, becoming masters of their industries and fighting to succeed all started to sink into me.

What made them different from me?

Did they have “conversations” with their superiors like I did? Probably not.

What did they have that I lacked?

Somehow these successful people didn’t wait for their boss to give them some promotion or expect permission to advance. They just found a way. There was no rule book for the paths they took toward success and toward their goals! Obstacles didn’t stop them, they were mere speed bumps to navigate. If they had no contacts: they made contacts. If they didn’t know how to get a product made in a foreign country: they went out and discovered how. If they didn’t know how to sell their product: they worked tirelessly to get it placed in a major department store with untold amounts of creativity.

Basically they didn’t take their circumstances or their external factors of any kind as the final word. They had their goal and every morning they woke up and sprinted toward it no matter what.

Their goal. Their purpose. Their own source of motivation.

Why couldn’t I be driven like that? I had goals. I had a sense of who I was and the kind of person I wanted to be. What was I doing waiting around for someone else to give me what I wanted? Or to present me with the resolution to my goal or current obstacles? Whose fault was it that I was being held back and limited?

“No way!”, I thought. My goals won’t happen if I wait for someone else to make them happen. I need to go out and reel it in myself. I need to be the one to force this goal into existence whatever that means. (Obviously within the boundaries of what is legal and ethical but hey those are really huge and open boundaries) The company I work for and the people there can’t be the thing that I am waiting on to help me and I can’t allow them to slow me down either. The challenges in my work don’t have to be terminal or even huge. I can choose to mow them down one at a time and not look back.

Once that realization hit me fully, I knew I had to take action.

Ultimately this self motivation I was finally discovering had other names that I didn’t like and wasn’t happy with: Accountability. Ownership. Obedience. Discipline. These felt stodgy and limiting before but I had to come to terms with the FACT that they were the only means I had to overcome my doubts and my excuses.

I am accountable for my own success. I am the owner of it. I am the only person who has to make it happen. No one else has that on their radar and they shouldn’t. I am the person responsible for my own future and the discipline it takes to make it a good one.

It was like a door that was locked suddenly swung open. I was unleashed. Okay that sounds cheesy. But seriously, my whole perspective on life literally was changed from that time forward.

After this crazy realization and many roof repairs, I had another opportunity to work more closely with those same bosses that witnessed my feedback tantrum. But because my motivation had shifted so strongly from external factors (like them) to internal factors (like my identity as a highly capable and focused individual) I just put my head down and worked. It was fast, focused, and accurate work. I didn’t care about anything but getting the work done and learning like crazy.

Lets just say they noticed. Big time. They didn’t know “what happened to me” but wanted more of it. (Notice that language even falls into the commonly held belief that “something must have happened” to me like a terminal illness or I suddenly had to support a child etc…an external circumstance forcing a change on me.)

You can make a similar change and tap into a spring of motivation that was otherwise unused! Here’s how:

First you have to stop believing in extrinsic motivation.
- Extrinsic Defined: “not part of the essential nature of someone or something; coming or operating from outside”
- We blame someone else for not keeping us engaged and motivated. We blame our circumstances for holding us back. We blame our bosses for not recognizing the time and effort we put in. But then we stay in that cage we’ve made out of excuses. We act paralyzed because of those things, not realizing we have the power to create change for ourselves.
- You never will have enough extrinsic motivation. Your tank is always only ¼ full and it can only be filled by factors outside of you.
Next we have to change our fuel source from extrinsic to intrinsic. Intrinsic motivation is different because it lives within you and feeds on the stuff YOU give it. It has less and less to do with other people.
- Intrinsic Defined: “belonging naturally; essential.”
- You decide what drives you based on your own goals, metrics, and qualities of character.
You decide WHO do you want to be? You are “this kind of person” so you’re driven and motivated in these ways. It’s woven into your identity and is inseparable from your actions.
- Example, “I am a hard working person who is driven to be successful and to bring excellence every day.” Now it’s personal. It’s reflective of who you are as a human being. You want to work hard on that project because it is just in your DNA to work hard. To be committed. To take its outcome personally. Yes you don’t know exactly how to do what needs to be done and that’s scary, but “afraid” isn’t in your core identity. The point is, you are staying true to your own integrity who you are choosing to be and what you care about. The only natural result of that is to live in line with that “new” identity. Be that person.

This is exactly the change that happened in me. Unfortunately for me the catalyst was negative feedback and the shame of my horrific reaction ruminated during weeks of manual labor on rooftops….

I want you to be able to recognize this in you now and change it.

Here’s an easy test: If you’re waiting on anything or anyone to become successful…you’re extrinsically motivated. (at least somewhat)
-Me

Here are more qualities of extrinsic motivations:

Focused on your effort
Waiting on someone or something to happen to allow you to be successful
Excuses outside your own choices
Circumstances are responsible for allowing you to progress or holding you down
You aren’t accountable
When you don’t know how to do something you Stop
Before committing you ask: What am I going to get out of this?

More examples of intrinsic motivations:

Focused on your results
Are only held back by your own drive or limits, no one else
You don’t believe in excuses
Circumstances come and go but you keep moving forward
You are accountable
You learn what it takes to continue and don’t stop
Before starting you ask yourself: What value am I bringing to this?

My challenge to you is to sit down for a few minutes and really be honest with yourself.

Where are you?

Are you in the extrinsic camp or the intrinsic camp?

What do you allow to slow yourself down?

What obstacles have you accepted as terminal?

Who are you waiting on to give you the golden ticket to success? If it has been of any value please send it to someone you know who it could also help.