Ramit Sethi: You Can Budget Too Little for ‘Guilt-Free’ Spending — Here’s Why
Written by
Nicole Spector
Edited by
Molly Sullivan
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Many of us feel guilty about spending money on nonessentials, often because money is tight and we know how precious every dollar is, especially as costs of living continue to rise. Money expert Ramit Sethi brought up an interesting argument that might surprise you in a recent newsletter: You can budget too little for guilt-free spending.
To explain his assertion, Sethi broke down the “conscious spending plan” (this is a series of Sethi’s where real people submit their budgets) of someone called Schriner, a 30-year-old construction estimator and trade show worker living in Georgia. Here’s what Sethi thought about how they’re spending their money.
Taking Almost No Vacation Days Is a Sign You’re Underspending on Joy
We can see where Schriner may be being financially unfair to themselves right away when they shared, “I’m working 321+ days a year between a full-time job and weekend job to sustain my debt-free lifestyle.”
You should not feel guilty about taking vacation days, even if they’re spent doing absolutely nothing at home if you don’t want to spend on a vacation.
Your Financial Situation May Be Greater Than You Think
Schriner asked whether they’re investing enough to their 401(k) plan (with a 4% match) by only contributing 8% of their pretax income to a company 401(k), in addition to maxing out a Roth IRA with their post-tax income.
To answer this question, Sethi analyzed Schriner’s entire financial spending report and concluded, “So far, I’d say you’re doing very well. You are … maxing out your 401(K), taking advantage of your employer match, and maxing out your Roth IRA, and you’re doing it automatically every month. This is how true wealth is created.”
If You’re Not Letting Yourself Enjoy Your Hard-Earned Money — When Being Responsible — That’s a Problem
Schriner said that their take-home pay was just 13% of their total income. The rest went to covering essentials, emergency savings, retirement planning and investing. In Sethi’s opinion, 13% of take-home pay is too low. Schriner, given their stellar financial standing, is allotting too little for guilt-free spending
“I usually recommend 20-35% for guilt-free spending, which is the money you use to say YES to things you love,” Sethi said. “At 13%, you might have made an intentional choice to spend less for some specific reason. But too often, people who are Optimizers spend tons of time agonizing over their savings rate…but they don’t spend nearly enough time thinking about how to use money to live a Rich Life beyond savings.”
Sethi added, “You’re working 321+ days a year and only spending $651/month on things that make you happy?”
If Schriner were in debt or were off track with retirement planning or were failing to invest, then maybe a lifestyle of deprivation would be more understandable. But in Sethi’s assessment, Schriner has “won the ‘personal finance’ game. Now it’s time to ask: What’s the money for?”
What To Do If You’re Guilt-Free Spending Is Too Low
Sethi instructed Schriner to increase their guilt-free spending up to 15% to 18%.
“That would be about $1,000/month for things you love — travel, hobbies, time off. You’ve earned it,” Sethi said. “You don’t need permission to enjoy your money – but I’m giving it to you anyway.”
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