318 | Deciding How to Use Your Money

Too many lawyers are living paycheck to paycheck, never have money for the things they want, or are racking up credit card debt.

If you can relate, this one’s for you.

In this episode, I’m sharing a training from one of my private programs that dives into how to align your spending effectively and some common pitfalls to look out for.

• • being in control of your money
  • aligning your spending with the things that are important to you
  • how to balance your needs, wants, and goals
  • recommended spending percentages for your needs
  • thinking about the effective decisions you’re making with your current spending
  • making changes to achieve your financial goals

• n/a

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Hey friend. Welcome back, and happy summer. I am doing something I have not done in the six years I’ve recorded this podcast, and that is taking the summer off.

In place of recording new episodes, I’m sharing webinars I’ve done, trainings from private programs, and past episodes. So, please enjoy today’s episode, and I hope you’re having a great summer.

****

In this video, we are going deeper on the expenses side of your budget and deciding how to use your money in the best way. You’re going to want to have the three-month lookback exercise you did, where you looked at your spending for the last one to three months. Have that handy as we go through this conversation.

Getting into how to use your money, ultimately, you can use it how you want to. You get to make those decisions because you are in control of your finances. You make the rules. Too often we forget that. We have authority over our own finances, but we defer to personal finance experts and other people rather than deciding what we want to do

You get to decide what you want to do with your finances. You are the ultimate authority, so you get to decide what works for you. With that being said, though, I do have some things for you to consider when thinking about those decisions.

First, you want to make sure that you’re using your money for things that are important to you. Often, we’re spending a lot of money on things we don’t even care about, which means we’re not able to use our money for the things we do care about. So I want you to think about the top five things that bring you joy or that you value or that are important to you.

This is not just in terms of spending, although it can be spending. But think about it in terms of life in general. You want the way that you’re using your money to line up with those things that are important to you.

If you go back to the three-month lookback exercise, compare your spending with those things that you just named. If I were to look at your spending, would I be able to tell that those were the things that are important to you. If not, you want to make some adjustments, and you don’t have to do it all at once. Maybe it can be something that you work toward over time.

For example, one scenario that comes up often with my clients is with religious or charitable giving. We do this identification of the things that are important to them, and their faith is really important to them or generosity is really important to them. But when they do the lookback, they’re barely giving anything.

They might set a goal that they want to get up to giving X amount each month. And then as they pay off debt or they reconfigure their other expenses—they get their spending streamlined—that frees up money for them to be able to achieve that goal of giving more.

That’s the power of being more intentional so you can use more of your money for the things that are important to you. Identifying the things that are important to you is the first level of deciding how to use your money. Beyond that you need to balance your money among your needs, wants, and goals.

I think of these as buckets that you’re always funding with your money. When you don’t have a handle on your finances, especially if you’re running up credit card debt or you’re overdrafting your account, you’re not able to build wealth and grow your net worth. Typically, it’s because your buckets are out of whack. Usually there’s a huge chunk going to either needs or wants and then the rest is going to the other. If you have a huge chunk going to needs, the rest of the money is going into wants. If you have a huge chunk going to wants, the rest of the money is going to needs. In both instances, you’re not funding your financial goals, which is not what we want.

Let’s talk about the needs bucket first. When I’m thinking of needs, I’m thinking of things that you literally need like food, housing, transportation, but I also include bills that you have like minimum payments on debt. Often these things are taking up way too much money.

When people first start paying attention to their finances, they will go straight to cutting back on going out to eat and coffee runs and all of that. But let’s look at this needs bucket first. Because if that’s taking up a huge chunk of your income, it doesn’t matter how much you’re cutting back on restaurants, or whatever else, it’s gonna be really hard for you to get ahead if the majority of your income is going to bills and housing and whatever else. It doesn’t matter how much you cut back on things that you want because you still don’t have the money available for the goals that you have.

The big players in the needs bucket tend to be your mortgage or rent, your car payment, and then payments on debt like credit cards and loans. When your mortgage or rent is too high for your income; your car payment is too high; and/or the minimum payments you owe are eating up a bunch of your money, you’re probably not going to feel like you have a good handle on your finances. I’m going to give you some suggestions for how much to spend here, but keep in mind that all of these are just my thoughts on the percentages, so they are not the end all be all of what you should or shouldn’t do. But I have found that these numbers tend to work out well for most people.

For housing, you want to keep it around 25% or less of your take home pay. And that’s not a hard and fast rule or anything where you’re automatically wrong if yours is 28% or 30% or something like that. But when you start getting too much higher than that, it starts to get really tricky because so much of your money is tied up in this one bill.

If I had to give you a number for your car payment, I’d say keep it to less than 10% of your take home pay. And again if it’s 12% or 15%, that’s not automatically wrong, but it starts eating into the other things that you can do with your money.

For your minimum payments on other debt, there is no specific percentage, but you want to keep them as low as you can. Watch out, too, for those buy now, pay later services like Klarna, and Afterpay. Because those are just mini loans, and the payments on those add up quickly. Again, it will start to eat into the money you have available for the things you want to do, and the goals you have. As you start to knock out those debts, you will start freeing up money each month, which will give you more wiggle room.

In total, you want your needs bucket, including bills, like your rent or mortgage, car payment, any other payments you have, groceries, gas, etc., to be no more than about half of your take home pay. That gives you plenty of room to spend on things you want, and still make progress on your financial goals. If you’re over that percentage, let’s start looking at what we can do to make more money and/or cut expenses.

Alright, so now let’s talk about the wants bucket. Maybe your bills are fine, and they’re not taking up more than half your income, but you’re not being intentional when it comes to your discretionary spending. Or in some cases, I’ve seen both, where the bills are high and the discretionary spending is high.

When we’re talking about your wants, I am talking about things that you don’t necessarily need, but you just want. And there’s technically a little overlap with the needs bucket in that there are things you need, but you don’t necessarily need the level that you have. You need a place to live; you don’t need a penthouse. You need transportation; you don’t need a luxury car. I’m not going to get into that distinction here. But it’s something that I want you to be thinking about as well. sFor the purposes of this video, let’s think about wants in terms of things like going out to eat, shopping, going on trips, spending on hobbies, all of those kinds of things where you don’t need them, you just want them.

Another thing that comes up here sometimes is how much you spend on activities and stuff for your kids, if you have kids. A lot of times people want to make sure their kids have all the experiences and all the things that they didn’t have. But if you’re going overboard with spending on those things, and it’s not fitting within how much money you have and the money that you have available, it’s going to be really hard for you to then make the progress that you want to make financially. You want to make sure that the amount you’re spending works for the income you have.

I think it’s important to make room in your budget for things you want. Having money available to spend on things you want will help you to stay on track with your financial goals because it makes the whole process of managing your money more enjoyable. But it’s about balance. So you want to make sure that you’re funding all three buckets and that you’re not overspending with needs and wants and then have nothing left for your goals.

Whether you are overspending on your needs or overspending on your wants, something has to give in order to make the progress you want to make with your goals. This is where you get to decide what’s more important to you. Is it more important to you to continue to stay in this house or in this car, or to spend at this level on these things or this lifestyle, to do those things rather than paying off debt and building wealth?

Because that’s the effective decision you’re making when you run out of money or you go further into debt or you overdraft your account, and you don’t have money for your goals. You effectively decide that the house or the car or the activities for the kids or the lifestyle is more important. Or if you’re going into debt each month trying to keep up, you decide that it’s worth digging yourself further into debt to keep those things.

If it is more important for you to have those things over your financial goals, that’s perfectly fine. You get to make that decision for your life, and you can go forward knowing that you chose that. But make that decision intentionally. You’re allowed to say, “You know what? It’s important to me that my kid gets to do this thing, or that I live in this house, or that I maintain this lifestyle. So I’m willing to not save, to not invest, or to go deeper in debt, and not achieve my financial goals to be able to pay for it.”

That’s fine, you get to make that decision. But make it intentionally. We often are not thinking about it in that way. If that’s not the decision that you want to make, then you have to decide what you’re going to change. If we look at your money like a pie, you get to decide how big a slice you’re going to give to the things you need, the things you want, and the goals you have. But it can’t keep being 100% or more of the pie going toward your needs and wants and nothing going towards your goals if you want to make a change.

If you’re like, “Oh, I just can’t spend any less on these things. I don’t know what I’m gonna do,” you’ve gotta be honest with yourself about whether you actually want to achieve the financial goals you say you want. Because sometimes it sounds nice in theory, but we’re not actually willing to do what it takes to achieve it.

If you truly do want to achieve the goals, you’re gonna have to change something. It might be a temporary change, but you can’t keep doing the same thing and expecting different results.

****

Alright, I hope you enjoyed today’s episode and got a lot out of it. If you have not done so already. Please subscribe to the show, leave a review, and/or share this episode with a friend or two who you think could use this information. All of that is how we get this podcast in the hands of more lawyers, and as always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.