Ramit Sethi: How To Create a ‘Conscious Spending Plan’

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Ramit Sethi, a personal finance advisor and the author of “I Will Teach You to Be Rich,” is also an advocate of conscious spending — as detailed in his “Conscious Spending Plan.” This simplified plan is designed to help people create different categories, referred to as buckets, to organize their money in a way that’s easy to understand and manage. It’s essentially a straightforward, no-pressure budget that anyone can get started with.

If you’re new to budgeting or are looking for a different approach to handling your finances, here are the steps to creating Sethi’s “Conscious Spending Plan.”

Understand Your Basic Finances

The first step is to understand where you currently stand with your finances. On Sethi’s website, he provides an Excel Spreadsheet that makes it easy to input your information and see how much money you’re earning and spending in different categories.

These categories are defined as:

• Net worth: This includes your assets, investments, savings and debt.
• Income: This includes your gross and net monthly income.
• Fixed costs: These costs should total no more than 50% to 60% of your take home pay. They may include things like rent, mortgage payments, utilities and debts. If you spend more than 60% of your income here, you may need to re-evaluate your budget.
• Investments: Totaling 10% of your take home pay, investments can include things like retirement savings, funding your 401(k) and other types of short- and long-term investments.
• Savings goals: Having savings goals, such as setting aside money for a down payment or creating an emergency fund, is a key part of financial wellness. You should allocate between 5% and 10% of your take-home pay to this category.
• Guilt-free spending: Accounting for no more than 20% to 35% of your take-home pay, this category is essentially for fun and recreational purposes. It includes activities like going out to eat, watching movies, purchasing clothes and other things you want.

By filling out this spreadsheet, you’ll get a better understanding of your current financial situation and what you should focus on next. Keep in mind that your situation and goals might be different from someone else’s, and that there is some flexibility in how you allocate your money. For example, you might need to spend less money on guilt-free costs in order to invest a higher percentage to meet your other goals.

Figure Out Your Fixed Costs

The next step to creating a conscious spending plan is to do the math and figure out how much you spend on the largest category: fixed costs. As fixed costs can include a large variety of expenses, take some time to sit down and really think about what you spend your money on each month — aside from investments, savings and guilt-free spending.

Using the Excel spreadsheet can make this process easier because it already accounts for many common expenses like rent or your mortgage payment. It also includes a separate row for food, clothing, subscriptions, insurance, utilities and so forth.

As Sethi points out, certain expenses are not applicable for all individuals. For example, if you don’t have debt, but you regularly spend money on your pets, you can add something like “pet fees” as a line to your calculations. That way, you’ll be able to see how it influences the percentage of this category.

You don’t have to worry about adding every little thing you spend money on. In fact, you might be better off keeping it simple by including only a few of the bigger categories that make sense to you.

If your spending fluctuates from month to month, take a look at your recent bank statements or credit card statements. Average out the past three to six months’ worth of statements to get an estimate of your monthly expenses.

Figure Out Retirement Goals

The next step is to understand your retirement goals. Following the “Conscious Spending Plan,” you should be setting aside 10% of your take-home pay for retirement purposes.

For example, you may want to contribute to your Roth IRA pr 401(k). Let’s say you earn $75,000 in a year after taxes. Using 10% as your goal, you should be contributing $7,500 of your income to retirement annually.

You can always adjust your contributions later, but this is a good starting point, especially if you’re new to saving for retirement.

Determine Other Savings Goals

Having savings goals is important since this will help you gain greater financial stability. With the Conscious Spending Plan, try to set aside at least 5% — ideally 10% — of your net income for savings. Within this category, you can include things like an emergency fund, family vacation, gifts, wedding expenses, or even a down payment for a house.

Focus on two or three main goals at a time. While you’re at it, set manageable smaller goals that serve as milestones as you save up for big-ticket items. This can help you stay motivated without getting overwhelmed.

Don’t Forget About Treating Yourself

Last but not least, you should have a separate category for non-essentials. The purpose of this is to give you some extra money that you can spend without having to feel guilty or worried about it.

Sethi broke this down into two categories:

• Worry-free spending: This is a small sum of money — say, $50 or $100 — that you can spend each month without having to think or worry about it. As long as you don’t spend more than this amount, you shouldn’t experience financial stress.
• Guilt-free spending: Similarly, you can put a small amount of money toward guilt-free purchases. This could include things like going to the movies or taking a vacation. It might require more planning; but, as long as you don’t go above your budget, you can spend the money as desired.

The combined total of these categories should be no more than 35% of your take-home income. Depending on your financial situation, you might end up having a smaller percentage of your money for this.

Bottom Line

And there you have it. By separating your income and expenses into these categories, you can create a simple but effective Conscious Spending Plan. You may need to make adjustments as you go or as your financial situation changes. But this can give you a baseline of how you should be allocating your funds each month — without having to think too much about it.

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