We all know crash diets don’t work, but are you trying a crash budget to reach your financial goals? You shouldn’t have to starve to reach financial independence, and you may not have to skip your favorite Starbucks drinks either.  Financial Planner LA  outlines how to have your Starbucks and drink it too.  What is the point of living if you can’t have great coffee when you want it?

You can do all the sit-ups you want, but without a healthy diet you will never end up with a 6 pack.  The same can be said for your finances: Without healthy spending habits, you will never achieve financial independence.   You may try and cut back on going out, or your favorite Latte’s for a bit, but if you’re still spending too much on your housing/car/travel/clothes etc you may still find yourself falling off track to reaching your financial goals, or worse in crushing debt.

Do you want to buy a house?  Spend some time in Europe?  Or maybe retire early?  You can do it if you set your mind to it, but it may take a little work.

You may have heard that a daily trip to Starbucks is what’s making you poor.  No more Starbucks = Problems solved right?  You will magically be rich right? Sorry Suze Orman, that is not how building wealth works.

In reality, it’s more likely to be your bigger fixed expenses that are doing more damage to your bank account.  Even if you ordered a fancy Latte and some food every single day that’s maybe $3600 a year spent at Starbucks.  By no means, a small amount, but probably less than many of us should be saving towards our financial goals on a yearly basis.

Here are a few rules of thumb to get your spending in line, and get on track to reach your goals.

Ideal Spending:  I realize depending on your current situation you may need to work towards these allocations.

Pay Yourself First!-  Save 20% between retirement accounts, and other long term savings goals.  This can include your company match on your 401(k). 

Essential Purchases-  50% This is mostly your big fixed expenses- housing, utilities, car, etc.

Everything else you want- Spend 30% Travel, Clothes, bar hopping, or even Starbucks.  (Pretty much all the fun stuff)

I know some of you may be adding up your big fixed expenses, and may need to make some hard decisions to get your spending in line.  How do your expenses compare to the Ideal budget above?

Can you really afford that car lease? Do you feel house poor? Drowning in credit card debt? Or even Student Loans?

I often tell clients “If you’re on track for your financial goals, I don’t care where you spend the rest.”   If you have the money saved up to fly first class to Europe by all means, treat yourself. On the other hand, if you are in credit card debt, and not contributing to your 401(k) may want to put that trip on hold, or at least see if you can save up some airline miles to pay for the flight.

How to Build the Perfect Budget:

Here is a little more guidance on your essential expenses.  If you spend more on one area, you will need to cut back on another.   A goal should be to spend no more than 30% of your take-home pay on rent. (You may be able to push this a little higher if you own your home, the tax deductions may save you some on the actual net cost).  10% on utilities, transportation, and 10% on groceries are also good starting points for your budget.    Spending less on housing, you can spend more on the fabulous car or your next vacation.

I am aware that hitting these numbers will be harder for some of you in the high cost of living cities.  If you go over the 50% mark on essential purchases, you may need to cut back on the “Everything else” category to keep you on track for your financial goals. Don’t, and I repeat, don’t waver on the 20% saving number!  This is what will drive you closer to reaching your goals.  It also can help provide a security blanket when life happens (IE job loss or your car breaks down).

Pain-Free Ways to Save Money

Look for ways to save money that don’t really require cutting back. Can you save a few bucks with a better cell phone plan?   Are you watching all those premium movie channels that are driving up your cable bill?  Even things like using miles to save some money on your vacations, I know you’re going to take them no matter what I say here.  Maybe even consider raising the deductibles on your insurance.

If you aren’t able to get the budget in line without going into a starvation budget mode, you may need to look at some of the tougher choices like can you afford where you are living? Or find a more affordable mode of transportation.   I know that feels great to drive that luxury car, but is it worth risking your financial future?  What’s more important to you:  Driving to work in a fancy car or a fabulous vacation.  You may have enough money for one, but not both.

Just like it takes a bit of work to get six pack abs, getting your financial house in order can take a bit of work.  Making smart choices may be able to get there a little faster and easier.  The easiest way to develop the habit of accumulating wealth is to make it automatic. Set up automatic contributions to your 401(K) (your employer may even help with a match, it’s like free money), and a long savings or investment account.  You may be surprised how you don’t even miss the money.

Now that you’ve made it to the end of the article, sit back and enjoy your Non-Fat-soy-piping-hot-favorite-Starbucks-coffee.

Until Next time, as always Be Fiscally Fabulous!

DAVID RAE, CFP®, specializes in comprehensive financial planning for the LGBT community. He lives in Los Angeles with his husband and two Chihuahuas.  He is also a Gold Member at Starbucks like every other person who has read this article. His membership did not cause him to go broke.

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