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. If I apply that to financial therapy, it’d be something like psych-fin-education. As you can see, that doesn’t quite 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 extracurricular 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! My hope in sharing these guidelines with The Middle Edit readers is to help you see where you are.
I use a three-tiered approach for most of my financial guidelines; Sufficient, Comfortable, and Abundant.
The first, Sufficient, implies that achieving this benchmark should provide a person with a sense of safety and security. For some, staying in the Sufficient tier is perfectly fine, whereas others like to use it to continue their journey towards the next level, Comfortable. This tier is Sufficient plus; you have enough, and you now have a bit more to help increase your sense of security. After the Comfortable tier comes Abundant. This is the tier where a person typically has enough to do everything they love and much more.
Let’s dive in.
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: Monthly Income and Expenses
I’m not a huge fan of the word budget; it sounds punitive and restrictive, like the word “diet.” I prefer spending plan because unless you are living on a commune, you are spending money each month. If you like the word budget, by all means, use it.
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. 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 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.
MMB Financial Guidelines: 80/20 rule (use post-tax income)
80% of income towards needs and wants (housing, groceries, utilities, car loan, insurance, travel, eating out, etc.)
20% towards saving and debt repayment (retirement, student loans, etc.)
Sufficient: Knowing expenses and income; expenses are less than income
Comfortable: Sufficient PLUS can save and/or invest
Abundant: Comfortable PLUS have more than recommended amount of money in savings and retirement
Let’s revisit Talia. Let’s say she is earning $65k in her job as a nurse manager, so after taxes, she is bringing home $4k/month. We already know her necessary expenses added up to $2,335. Using the 80/20 rule, she 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.
Why do you need to save for retirement? Simply 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.
MMB guideline: multiply your annual salary (pre-tax)
Age 30: 1x annual salary For Talia, $65k
Age 35: 2x annual salary $130k
Age 40: 3x annual salary $195k
Age 45: 4x annual salary $260k
Age 50: 6x annual salary $390k
Age 65: 10x annual salary $650k
Though the idea of accumulating ten times your salary might seem overwhelming, if you save and invest early and consistently, you have the benefit of compound interest on your side. The fantastic thing about saving for retirement is that anything, $100 a month, is better than nothing. Start now if you haven’t already.
Income – Any amount of money earned
Expenses – Any amount of money spent
Emergency Fund – An easily-accessible savings account to be used in case of an emergency
Compound Interest – Earning or charging interest on top of an original balance.
Compound interest IRL: You put $1,000 in a savings account that is paying you 1% interest. As a result, 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.
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.
Lindsay Bryan-Podvin, is the founder of Mind Money Balance (@mindmoneybalance)and the first financial therapist in Michigan. She brings financial literacy to women in an empathic, easy-to-understand way that unravels internalized barriers to feeling amazing about managing money. With a background in mental health research and psychotherapy, she thrilled to offer these unique, and much needed, services in our community. As she is aware that her services aren’t accessible to all, she also volunteers with Circles of Washtenaw County, a program with the goal of breaking the cycle of generational poverty.
80/20 Spending plan: https://www.thebalance.com/dont-like-tracking-expenses-try-the-80-20-budget-453602
Compound Interest Calculator: http://www.moneychimp.com/calculator/compound_interest_calculator.htm