A Better Way to Do Long-Term Financial Planning & Budgeting

I was thinking the other day about how my lifestyle would change if I moved to a place like New York City.

Moving from Texas to Colorado was relatively easy, from a ‘budget restructuring’ standpoint – while Colorado is more expensive than Texas – they’re still on the same planet, metaphorically speaking. To be annoyingly specific, Dallas’s cost of living index is 101.6, and Fort Collins’s is 118.3. 

So yeah – it’s more – but it’s not astronomically more. It was simple to migrate my Dallas lifestyle to Colorado and adjust in a few areas (more money toward rent, less toward eating out, etc.). 

But as I thought about other places I’d like to live someday (like New York City), it felt like we were leaving Earth and taking a leased SpaceX rocketship to Jupiter.

My rent jump from Dallas to Fort Collins had more to do with the fact that we went from a 2BR apartment to a 3BR home, but also – sadly – that the cost of living index for Dallas housing is 92.9 and Fort Collins is – are you ready for this? – 168.1. That’s 80% higher.

Our rent went from $1,741 in Dallas to $3,000 in Fort Collins – a jump that represents slightly less than 80%. 

But housing in New York City? Try on “294” for size.

When I was thinking about a hypothetical New York City budget, I felt like none of my standard ‘regular-ass place to live’ ground rules made any sense anymore. It got me reflecting more broadly on whether or not our typical “best practices” ground rules are the most efficient way to create budgets in the first place.

I remember getting my first salary – the #1 question I had? 

“How much of this should I save?”

Followed closely by, “What’s a reasonable amount to spend on rent?”

Then, “How much ‘car’ can I afford?”

I wanted a neat framework to layer on top of the one factor I knew for certain: My income. More precisely, I wanted someone to prescribe to me a realistic amount to spend, save, and invest each month. 

What if there’s another way to plan in the long-term for these types of things?

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Hypothetical examples are for illustrative purposes only, not attributable to any specific portfolio’s performance, and should not be utilized when making a specific investment decision, as actual performance may vary depending on your unique circumstances and factors not necessarily accounted for here, such as market volatility, inflation, advisory fees, reinvestment of dividends or earnings, rebalancing, or tax-saving features, etc. Rate of return is assumed to be compounded annually. All performance, events, persons, and results described herein are entirely fictitious.

I’m going to use housing for these examples because it’s something that most people can relate to if you like to indulge in the human need for shelter, whereas other slipperier budget items are more dependent upon preference and variables that would be too irritating to try to standardize.

For example, if you make $3,000/mo. and use the 30% rule to judge your maximum cost of ‘responsible’ housing, you shouldn’t spend more than $1,000 on the roof of your head (lest you feel hella strapped). 

But let’s take this to an extreme to illustrate what I mean: What if you make $15,000/mo. in New York City? Should you spend $5,000/mo. on housing?

Should someone who makes $10,000 automatically upside to a place that costs $3,333 if they’re happy in a spot that’s $1,000? No!

Maybe starting with our income and backing into an appropriate budget isn’t the best long-term solution. It’s a great starting point when you’re in the “average entry-level salary” bucket and need some parameters to prevent you from going USDA Choice buck wild, but quickly loses its utility as you earn more (or move to a place where the rules are made up and points don’t matter, economically speaking).

Maybe – instead! – we can start with the type of lifestyle we’d like to live, and then reverse-engineer the income needed to make it happen comfortably (while still allowing for investing at the pace we’d need to in order to reach financial independence in a reasonable amount of time; if you’re looking to start investing, check out Betterment’s investment options like a Roth IRA offering or General Investing goal). 

Sure, it’s not as actionable in the immediate-term, but imagine understanding exactly what you’d need to create the life you want: Then job-hunting accordingly. 

How would you execute this in practice?

You’d probably start by assessing what you’re spending now and how those numbers would have to shift in order to hit your ‘ideal life’ budget.

(Granted, this whole ‘ideal life’ thing is slippery and nuanced, but it’s the difference between, “I make $4,000 per month so my cost of housing shouldn’t be more than $1,200,” and, “The place I actually want to live in costs $1,500 per month, so how does my income need to change to support that?”)

Like I said, not as actionable short-term as cutting costs, but — I think — a more effective way to plan financially and design a life that you love by adjusting the factors that we formerly treated as fixed and limiting (read: income).

Maybe that means in the meantime you’re following the standard rules of the road, but you can be actively working toward something better.

You may decide that your ideal budget is as follows (let’s indulge, yes?):

• $1,500 for the roof over your head

• $400 for the sweet luxury sedan in the driveway (hey, maybe you’ve got a long commute – I’m looking at you, LA)

• $800 for Whole Foods binges

• $500 for restaurants, coffee shops, and bars

• $500 for all other living expenses (clothes, streaming, pets, etc.)

• $200 catch-all miscellaneous overflow

• $100 for personal care (haircuts, facials, astrology palm readers, etc.)

Great. That’s $4,000.

What if your current income amounts to $3,500 after taxes? Well, then we know we don’t have a spending issue on our hands – we have an earning issue.

Spending $4,000/mo. means you’ll spend $48,000 per year, giving us a nice round ‘financial independence’ number of $1.2M.

Fantastic. Now we get to ask the super fun question: How long do you want to work? 20 years?

Great. We’ve got 20 years to hit $1.2M (inflation-adjusted), and we know we want to make enough to spend $4,000/mo. 

Doing some back of the napkin math (and by that, I mean I plugged these figures into my Financial Independence calculator I built), if you’re starting with $0 in invested assets today and want to spend $4,000/mo. adjusted for inflation in perpetuity, you’d need to make $110,000/year to become financially independent in 20 years.

See? Math is fun when it clarifies what you need to do to live your “ideal life.” And like I said: Even if you have $0 invested today, it’s still a 20-year timeline. (Investing with Betterment can make starting insanely easy, too, since their algorithm automatically takes your investing goal details into account when it determines your allocations.)

That calculation assumes a few things: 

• You’re getting a 3% income bump annually

• Your spending is increasing by 3% per year, for inflation

• You’re getting an 8% return annually on your investments, on average (when accounting for inflation, it’s a real rate of return of 5% on average, so relatively conservative)

Work is for money, and money is for living a great life by design

This is helpful, no? Imagine realizing that you could (a) live your ideal life and (b) retire in 20 years with a salary of $110,000. That could really help direct your career pathing if you know, for example, that managers at your company top out at $95,000 – maybe it’s time to look elsewhere, if that’s the case.

Or, you might find that you’re actually already pretty close to (or above) that number, and realize you’re right on track and can stop feeling guilty for having ‘expensive’ rent. Expensive is relative.