Episode 30: What Works Wednesday: Reverse Budgeting: The 50/30/20 Cash Flow Freedom Plan
December 20, 2023
Join host Leland Gross on "What Works Wednesday" as he introduces a game-changing approach to cash flow planning – the 50-30-20 method. Say goodbye to restrictive budgeting and embrace a plan that prioritizes abundance, automation, and financial clarity. Learn how to keep fixed expenses under 50%, and enjoy a flexible 30% for discretionary spending, and automate your savings at 20% of your income! This episode unveils a practical and liberating cash flow plan, providing a clear roadmap to financial freedom. Take charge of your finances and build the life you desire. Prosper with the 50-30-20 cash flow plan!
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TRANSCRIPT:
Leland Gross (00:01.002)
All right, welcome back to What Works Wednesday. Today we're gonna be talking about cashflow planning, or some people call it budgeting. But if you've listened to this podcast or you know me at all, you know I hate the word budgeting. I think that word itself is a bad word because of what it denotes or what people kind of connect that to, which I would call financial dieting where we say, you know,
I need to live on all these line items and it's really restrictive. And even if you did great in one category, you overspent and coffee that month. And so you didn't do your budget right. And what it ends up doing is it creates more of a scarcity mindset around finance than an abundance mindset. It's a tool that's designed and I do know that if it's done well, it can do this, but it's designed to create freedom around your finance.
But too often it becomes, you know, I'm not good at this or it's really restrictive. I can't do this, that or the other. And just like dieting, you get burnt out and then you go binge and you go spend or you throw it out the window or you don't keep up with it. It's too laborious. And at the end of the day, we need systems in our finances. This is true for everyone that are simple and easy to follow and easy to track.
Oftentimes, we get, we're at our day job all day long, or we're with kids all day long, we come home, we're doing dinner, we're going to the gym, we're doing laundry, getting the kids down, doing homework, whatever it may be, we've got all these things. We know that money's important, but it's not urgent. It gets pushed to the back burner. So then if you've got to go through a whole spreadsheet or have to go categorize every single transaction on an app, you do it for a bit and then you get burnt out and you don't do it.
So I want to propose a different kind of cash flow plan. I want to propose a plan that I've seen really work that gives a lot of freedom, that is abundance focused, but still gives you a feedback loop of how much am I spending? Am I overspending? Am I saving enough? Because those are the questions I get as a financial planner, which is, am I saving enough or?
Leland Gross (02:25.322)
you know, am I spending too much? What's the right amount to spend? So here's what I would propose. I do, I prefer reverse budgeting or what I'm going to call the 50, 30, 20 cash flow plan and how the 50, 30, 20 cash flow plan says is we're going to start with savings. Oftentimes we start with our expenses. This is how much money came in. Here's all my fixed expenses. Here's all my discretionary expenses. Whatever's leftover is what I can save.
We're going to start with saving because that's the important part. The reason we care for spending too much is to make sure we're saving enough. So I tell people shoot for 20% of your take home money, you know, $10,000 comes in, you want to save 20 or $2,000. You may not be able to do that right off the bat and that's okay. It's the goal. It's what we're going to work towards. So as you get raises, maybe we'd put that towards savings or as you get a tax refund, things like that.
But we're going to automate that. So whether it's to your 401k, whether it's to an HSA, a brokerage account, a high yield savings account, we can talk through prioritizing those later in a different episode, but we're going to make sure that we're saving 20%. Then we're going to go to look at your fixed expenses, your mortgage payment, your car payment, rent, utilities, cell phone bill, car insurance, all of those things
aren't active spending decisions. They are passive decisions. You just have to pay your utilities to keep your lights on. You have to pay your rent. You got to pay your car insurance. Now, we can work with those to try and get those down and make wise decisions, but those aren't everyday swipe a card decisions. So we put those in the fixed bucket, which we want to make sure that stays at or below 50% of your income.
So if you're taking home 10,000, 5,000 is a healthy place to have all of your fixed expenses. Again, you may not be there. We can work towards it. There's freedom in this plan. But that gives us a budget, right? So hey, if we know that your fixed expenses are 3,500 and you're trying to decide, can I afford a car payment? Can I afford a home equity line of credit payment? Can I afford a bigger mortgage? That's kind of the...
Leland Gross (04:51.426)
bar. That's sort of our bucket. Okay, well you have up to this amount, $5,000 if you take home 10 in a month. And that gives us kind of wisdom to say, am I spending too much? Is this a wise purchase or not? Is will your payment push you over that 50% mark? And 50% isn't arbitrary. If your fixed expenses are hitting 60, 70% of your pay, you're not going to have enough wiggle room to really
live your life and save. 20% well we know we need to save at least at least 10 for retirement, we want to save for our kids college, we want to save for a rainy day or emergency or vacation, we need to be saving money. If you're saving only you know 5, 10, 12 percent of your pay, it's probably not enough. We need to we needed to work to try and increase that. But if you're saving 30% of your pay, hey that's great, you know more the merrier but
know that you can go up on your expenses, you're over saving, you know? And so we have these as guidelines, as kind of, I think, of bumpers on bowling alley lanes. So 50% is your fixed, 20% is your savings, and that leaves 30% of your pay to be your fund money, your discretionary money. Go out to eat, go get coffee, buy some stuff on Amazon, go shopping, do whatever you want to do. I don't care. I'm not going to go through line by line and say, well,
you really overspent on dog food this month, or you got too many gifts for your kid's birthday, we don't need to get that granular. If you get that granular, it's gonna create a scarcity mindset. So we just say, hey, your budget is $3,000 for the month for whatever you want it to be. If you know it's your kid's birthday and you're gonna spend more on a birthday party and on gifts, maybe don't go out to eat as much.
just this month. Next month when you don't have a birthday party, go out to eat. Who cares? But it gives you kind of that flexibility. Then on top of that, we can also isolate that 30%. So that's your flex spending. So 50% is fixed, 20% is savings, 30% is flex. And we can say, we can break that out weekly and say, all right, if 3000 is it for a month, what is it per week? You know, $700, whatever it may be. And then you can just get a
Leland Gross (07:15.578)
one card for that budget and say, all right, what did I spend on this card this week? I spent 600. Great, I was under. Next month, next week I could spend more. I was over. I went to Costco this week. That's a once a month thing. So it's going to be more. Okay, great. But it gives you this feedback loop of freedom that just says, hey, this is what you spent this week or this month. Great, you did great, or we can do better next month. But we've
isolated out your mortgage, your utilities, your property tax, things like that, that aren't active spending decisions. And then we isolated just the ones that are active decisions. What you go, what you buy in groceries, what you buy at restaurants, what you do shopping, things like that. And so we can actually get a clear picture of your spending and it's just a feedback loop. You know, great, you went over, who cares? Just don't do it next week.
we're gonna kind of stay in this 50-30-20 world. And in different seasons, those percentages in reality will be off. It's not gonna be a clear 50-30-20. But we know that that's how we want the pie distributed so we can work towards that. What I found if you implement the 50-30-20 cashflow plan is it creates a lot of clarity of what's my fixed expenses and what can I afford for my fixed expenses. It gives it...
automates your savings, so makes sure you are saving enough and gives you clarity if you're not saving enough so we can start working towards that because we know this is how much you're saving of your income. It's not a dollar amount. It's this is the percentage of your income. Some people need to save more to keep up with their lifestyle or their income level. And then it gets really clear on what you're actually spending so that we can say, you know, yeah, this was a more expensive month. We took a trip. Okay.
Great, next month is not. And we can kind of track your flex spending. And that gives us a lot of clarity, a lot better of data points on habitual spending and savings. It automates your savings and it gives us a lot of freedom. It's not restrictive. It's just, here's the ballpark we're working with. So if you're someone...
Leland Gross (09:37.358)
who even after you've paid yourself through your business, I know people who do the 50, 30, 20 in their business. Typically there's different percentages because we break it out into like marketing operations, you know, taxes, things like that. But even once you pay yourself into your personal, if you're someone who struggles with quote unquote budgeting or cash flow planning, this is a great tool to just take an inventory, figure out what the dollar figures are, automate your savings and start going with that. All right.
Go forth, build the life you want, and prosper.