How to Build Your Conscious Spending Plan

Are you finally fed up with ending the month with no money left? Well, you came to the right place, in this article I'll be discussing how you should create your conscious spending plan to help you get your spending back on track.

It's no secret that we are terrible at saving money. In a 2020 survey by Mint, they found that 65% of Americans don't know how much money they spent last month. If that sounds like you, then stick around because by the end of this article, you will have all the knowledge you will need to start saving more.

Most people run away when they hear the word "budget." Most people claim they keep a budget, but in reality, very few actually do. So why is that? I think it's because people know they need to reduce their spending, however if they created a budget, they would likely have to cut out some of the things they love.

It's very common to hear advice like, "stop spending money on coffee, stop eating out, and stop buying new shoes." But what if those things bring you real enjoyment? Are you even a little bit likely to cut those things out just to stay within a budget? Chances are, not likely.

Therefore, that is why I don't like the word budget either. Instead, I like the word conscious spending plan, which is what Ramit Sethi writes about in his book, I Will Teach You to be Rich.

The main idea is that you cut costs on the things you don't love but spend extravagantly on the things you do.

Ramit writes, "It's not about simply cutting your spending on various things. It's about what's important enough to spend a lot on and what's not, rather than blindly spending on everything."

The problem is that nobody is deciding what is important and what is not. They just spend money without even thinking and it gets them into a lot of trouble at the end of the month.

So, if you want to ditch the budget and create a conscious spending plan, then let's now dive into what your conscious spending plan is going to look like.

The conscious spending plan is broken into four buckets:

• Fixed costs
• Investments
• Savings
• Guilt-free spending

1. Fixed costs (50-60%)

These are your basic necessities that you need in order to live each month.This includes things such as rent/mortgage, utilities, medical insurance and bills, transportation, debt payments, groceries, internet, etc.

This should make up about 50-60% of your take-home pay, which is after-taxes. You'll notice that these things add up pretty quickly. So, keep an eye on anything that you think you might be able to cut down on, such as getting a cheaper car or finding a roommate to split the rent. The less you spend in this bucket means the more you can spend in one of the other three buckets.

2. Investments (10-20%)

This includes all the money you will put into your investment accounts like 401k, 403b, IRA, HSA, etc. At a minimum, I recommend putting 10% of your take-home pay; 20% is even better. The more you invest, the better chance you will have of being able to retire early and with more money.

One thing to note is that you will need to add back in your 401k contributions to your take home pay if your employer withheld the money for you.

3. Savings (5-10%)

This includes any money you will need for big ticket items like vacations, down-payment on a house, emergency fund, etc. I recommend putting 5-10% of your take-home pay into your savings. I also recommend having a 6-month emergency fund before you start saving for other big-ticket items.

So, once you have your emergency fund, think about anything you might want to buy in the future and figure out how much money you will need to save per month in order to afford it.

4. Guilt-free spending (20-30%)

So now that you've paid your fixed costs, funded your investment accounts, and put some money aside into your savings, you can now spend the remaining on whatever you would like.

This includes things such as dining out, going to clubs, movies, buying designer clothes, a Netflix subscription, etc. Anything you want. I recommend spending about 20-30% of your take-home pay here.

Most advice tells people to spend as little money as possible on things like this. However, it generally causes most people to not want to create a budget. So, I say, go ahead and spend 20-30% of your money on anything you want.

I have created a Google sheet that you can use to create your conscious spending plan. Link here.

So, once you have created your conscious spending plan, you now need to track your spending each month and see how close you end up to your plan. Your conscious spending plan doesn't have to be set in stone; therefore, you can make tweaks each month until you find the right allocation that suits your lifestyle.

I highly recommend using a tool like Personal Capital or Mint to track your spending. These are tools that will aggregate all your accounts and give you a nice insight into what your spending your money on. They will even let you setup a budget target by category for easier tracking. Both are free, so check them out.

Here are some more tips to help you stay focused:

1. Set realistic goals: if you're currently not saving any money each month, don't expect to instantly start having a savings rate of 10% or more. It's okay to ease your way into your conscious spending plan. Each month plan to get a little bit better than the previous month and eventually you will drastically change your spending habits.
2. Don't compare yourself to other people: Trying to keep up with the Jones' is a real thing and an easy way to get yourself into debt. Stick to your plan and you'll be able to start building wealth.