As a self-described money maniac, I feverishly scour money blogs on a daily basis, there’s an endless number of personal finance books in my reading queue, and I love learning about all the new budgeting apps in the works. Yet there’s a big part of me that is convinced that the rules of personal finance are broken.
So you ask: Why are the rules of personal finance broken, Jackie Cheapster?
And I answer: Because financial wellness is a lot like getting back into physical shape: The rules are easy, but the actual doing is super tough. Being physically fit entails two things: Exercising more and eating healthier. Easy enough, right?
But most of us do not enter a gym with the ideal BMI index and eating negative-calorie salads. We’re overweight, spend most of our time disintegrating in front of a couch, and eat crap food.
The fundamental rules of financial wellness are simple: Spend less than you earn, and find ways to make your money grow. But with all the formulas and rules out there on how to save, it seems as if they’re written for people with perfect financial situations where they make a decent steady income and can afford to put money toward all their goals. Riiiight.
The reality is that if you’re a freelancer you don’t always have a steady flow of income, and you don’t have perfect money-saving habits. We’re human and thus flawed. So, let’s get real, shall we? Let’s look at some of the most popular rules of personal finance and how they can be tweaked to make them work for you:
The 50/30/20 Rule.
What they tell you to do: 50% of your take-home pay goes toward your fixed bills (i.e., rent, utilities, subscriptions), 30% of it goes toward flexible spending such as food, gas, entertainment, hobbies, and 20% of it goes toward your savings and paying down debt.
Instead: This would be totally realistic to do if your rent was under 30% of your income, but as the U.S. as a whole is dealing with unaffordable housing, some of us are paying 50% and upwards of our income. While our fixed bills may not be in total control, really try to keep the 30% (i.e., your flexible spending) as low as possible. That way you’ll have more to play around with on your savings.
Rule: Have 3-6 months in your emergency savings account.
What they tell you to do: You should ideally have 3-6 months worth of your basic expenses socked away. If you’re a freelancer, it would be great to have 6-12 months. If you’re at the top of your game, you might even want to have a separate account for your vacation/sick days.
Instead: Start with what I like to call a Baby Emergency Fund, meaning you have 1-2 months of emergency money socked away. As you’re starting out, have this fairly accessible. You can tap into it whenever you’re having a tough month. Do your best to keep it topped off, but don’t be too hard on yourself if you can’t. If you have a great month or two, consider creating a Mama Emergency Fund, where you stow away that delicious 3-6 months of emergency savings.
Rule: Diligently save $1k every month in your retirement fund from the time you’re 25.
What they tell you do to: Because 401(k) plans started in the early ’80s and people are now starting to cash out on them, there has been a lot of hubbub recently on how to save a cool million by the time you’re 65. Very cool, right? The problem is that most of us did not start saving for retirement in our 20s, and we’ll be forever playing catch up.
Instead: Although I personally nag my friends to sock at least a little away, sometimes you need the money now to survive. Instead, save what you can, when you can.
Look at different options. If you are self-employed or don’t have access to a retirement plan through your current employer, there’s SEP (self-employed pension) plan, Traditional or Roth IRAs, or the relatively new U.S. Department of Treasury-backed myRA. If you’re doing temp work through a staffing agency, they might have a 401(k) that you can put money into. One thing you’ll want to check is whether or not certain plans have a window where you can change your allocation. For instance, at my past job I could only change my allocation amount 4 times a year. So if you don’t want to be locked in, check on this beforehand.
While the rules of personal finance have good intentions, there’s no one-size-fits-all. Do your best and what you can with what you have, and don’t feel bad if you can’t stay on top of your goals all the time.
Do you do think the rules of personal finance aren’t realistic? If so, what are you doing differently?
