The Money Chain

Last time I shared how a book called Profit First inspired me to revisit the idea of assigning percentages to create your budget. 

This made me decide to regroup my own categories into Expenses, Saving, Investing, Debt, and Spending. These groups of category groups felt right to me, but you may want to do some individual adjustments based on how you like to think of your money. 

But even if we use percentages as a guide, how much should we be assigning to each category? 

Using the 4 rules for Finding Margin, we know our money goals are to establish a budget to control expenses each month, start saving more for retirement until we reach 15%, work to extinguish the cycle of debt, and then ensure that our category groups reflect our values when it comes to spending money. 

Out of those 4 rules, the only number we have to work with is increasing our retirement investing to 15% so the rest will be up to us. 

After retirement investing, how do we decide where our money should be going?

Our category groups aren’t buckets that should all be created equal. Really, there’s a hierarchy of importance for how our money should be spent. Just like there’s a food chain in nature, we should treat our money as if there’s a money chain that guides us in how we spend. 

I can’t tell you how much you should spend, but I’ve got a compass that should help you decide what feels right.

So what’s at the top of the money chain? The only category group that has a specific number assigned to it in Finding Margin- Investing.

Investing

This is the most important long term strategy for your money. Start right away if you can, start investing as soon as you can if it’s not today. By investing, you’re ensuring you have enough money for the years after you retire. Work up to 15% of your income total saved each month. If you can’t save 15% today, start with 1% just to establish your accounts, get the automatic transfers going, and working on the habit of investing. If you can’t save 15% today, I probably don’t have to tell you that there’s a category group down the chain taking up too much money.

Saving

This is all of your saving that isn’t included in investing to reach medium and long term goals. Saving is important because it’s likely the experiences and the things that we’re saving for that are the most important things in our lives. This group means more to us than a short-term impulse purchase. It’s saving money for a trip you’ll remember your whole life. It’s saving up for the big ticket purchases that make a huge difference in your life. The number you assign here needs to align with your lifestyle and your priorities. Only you can decide how much feels right here. Look to the categories below if it’s not where you want it.

Expenses

This is how much it takes to run your life and it’s going to be your biggest category group by percentage. It’s all the things for your housing, the monthly expenses you’ve signed up for, and the groceries and other needs that you’ll need to spend each month. It’s also where I’m putting irregular expenses that I save towards each month. If it’s a need or it’s a bill I’ve signed up for, it goes into this category. 

Ramit Sethi says this category needs to run between 50-60%. The problem with this number is that it isn’t always going to work for your lifestyle or phase of life. Daycare, for us, has meant that there’s no way we can hit this number. 

So that means that other numbers will need to take a backseat to this one. Now that we have only 1 kid in daycare again, we’re getting closer to it, but it’s still not there.

Monthly expenses are more important than your down chain numbers below, but less important than investing and saving above. But if this number is bigger, it likely means you won’t be able to contribute what you’d like to the other groups. 

This is how you decide if you can afford adding something to your life. How much will it take away from the other category groups when you add it to expenses?

Debt

This is all debt that isn’t your mortgage, which goes under expenses. It’s not very important, but you’ve signed up for it anyway. This number is going to include your minimum payments as well as any extra you put towards paying them down each month. 

I know it may be confusing that I’ve placed debt beneath investing, saving, and expenses, but what I really mean is that the act of signing up for more debt isn’t as important. 

The best thing to do would be to not have any of it. Since you probably do, work to extinguish the cycle of debt by not taking on more and paying down what you do have. 

When it comes to debt, there are two numbers to consider here. 

1. How much money are you wasting on interest by having debt? There’s a big difference in the amount of money wasted on interest between credit card debt and a car loan. 
2. How much money is taken away from your other category groups by going into debt? Your past decisions take away from your current choices.

It would be way more important to save more and create more opportunities for experiences and purchases that mean a lot to you. If you’re putting too much money into things you had to borrow for, it will choke your other categories. Work to pay this down so that it’s out of your life.

Whether you decide to go all in on debt payoff like Dave Ramsey says is up to you, but make sure you get it done so that categories like investing above don’t stay completely turned off for too long.

Spending

The last category and the lowest on our Money Chain. Not as high of a priority when compared to other groups up the chain, but without it, there’s no room for impulse or novelty, which are important. If your money, after trickling through investing, saving, expenses, and debt have left you too little here, work to minimize up the line, and work to free up money so that you have some room for spending along the way.

But also, work to contain spending so that it fits in line with your bigger goals. We’ve too often been guilty of overinflating spending to the detriment of other goals higher up the chain. 

Your spending money is the dessert after the meal. 

You need some to live a little, but have too much and you may see your weight start to fluctuate. 

I’ve been guilty in both of those areas.

Putting it all together

Last week I shared a google sheet that allowed you create a budget based on these 5 category groups, see where your spending percentages are today, and make decisions on how you’d like to see your money change. 

I know our priorities haven’t always played out correctly, and you may find that yours have been off too. Just use this as one more way to view your money and make sure that you’re using it to support your life in ways that matter to you.