Back in February I created a fairly simple financial plan for a friend of mine.
The good news: She was very appreciative and almost immediately boosted her 401k contributions from 6% to 15%. And she opened a savings account with me (I'm a banker) with her first quarter bonus check and put in $4K that she "can't touch" (because I didn't sign her up for online banking or get her checks or a debit card).
The not so good news: She didn't cut her spending, and as a result she hasn't saved anything more, and I recently found out she's been carrying about $4K in credit card debt. This despite the fact that she earns about $115K a year. And she has lived rent free with her parents for nearly a year.
Step Two - Budgeting
Recently she's been complaining about money stress and she begged me to sit down with her and help her figure out a budget on Mint.com. I sort of wearily accepted, even though I had a feeling it wouldn't help anything. I mean all she has to do is put $1250 in savings every month as a "rent" payment to herself. The details of a budget are pretty pointless if you can't even manage that step in her situation.
But I did it, and I love that kind of stuff so I spent hours categorizing her expenses and getting her 3 solid months of spending to view consider. It wasn't pretty, but it wasn't really surprising to either of us either. Her 3 months of spending looked like this:
Food & Dining - 22% - $4,476
Car - 22% - $4,453
Shopping - 19% - $3,737
Personal Care - 19% - $3,689
Cash and Other - 8% - $1,535
Bills - 6% - $1,141
Pets - 4% - $495
"Bills" consist of gym, furniture storage, and phone (which is for a new iphone she technically doesn't need because her company pays for a blackberry); so other than her car pretty much 100% of her spending is discretionary.
She had just gotten her 2nd quarter bonus and asked me what she should do with it; I insisted that she use it to wipe out the credit card debt, even though she said she "didn't mind" carrying a few grand of card balances. As a banker and finance blogger I was momentarily stunned at that, and I tried to quickly explain why she should never tolerate that debt. She loses interest quickly in my financial schpeels and waved my explanation away, but she agreed to my suggestion and wiped out the debt.
She seemed to be making genuine changes after seeing her Mint figures and was eager for my advice, so I created a new budget for her with one column for current and one column projected for when she moves out on her own again. Basically I recommended she save the amount her rent and utilities will cost, plus the amount she should be saving anyway, which should get her to a good reserve fund (and ready to move out on her own) by the end of the year.
To do that I had to recommend that she slash her shopping/personal care as well as food and dining and only add those types of expenditures when she gets a bonus (the budget was based on her base salary).
Step Three - Abandoning the Budget
We have been kind of out of touch for the last month since I gave her the budget because we've each been traveling. I talked to her yesterday though and was shocked at her announcement that she was ready to move out and looking at apartments. Obviously she was ignoring my advice to build up a savings cushion first - and I had to wonder how on earth she was going to afford it if she was struggling to make ends meet while living at home.
But at the same time I didn't want to seem like a Debbie Downer unsupportive friend. She CAN afford to move out of course - which she reminded me - but only if she is willing to cut her spending. Otherwise she's just going to rack up credit card debt at an even faster rate between bonus checks.
She swears she has but back on her personal care (no more weekly tanning or weight loss clinic visits) and shopping (no more buying a new outfit every time she goes out), which is great. But I'm must less excited about her primary argument for being able to afford to move out - that she's going to cut her 401k contributions back to 6%. She keeps saying "that will save me like $500 a month" which grates my nerves to no end. I finally couldn't help but point out that cutting retirement savings is not "saving" her anything - it's just giving her more money to spend.
She also keeps reminding me in an annoyed voice that the budget I made was based on her base income of $70K, and last year she made $110K. The problem with that is that she's not guaranteed to earn any bonus, and in fact she got a whopping $0 for the first quarter of this year. Also she has been so stressed about work she has mentioned multiple times in the last 2 months that she may either quit or get fired.
Step 4 - My Learning Curve
But again, I don't want to overstep my bounds by reminding her or berating her about these things. I mean if she wants to cut her retirement savings in order to afford to spend more money that is really not my business I guess.
But now I'm involved. And it kind of irks me that she keeps defensively hinting that my budget was unrealistic. After all I've been living well off a similar one for years. She just doesn't believe me that she can save that much and spend that little while still having a fun Uptown single girl lifestyle.
It also irritated me that she looked at renting an apartment in my building (where I own) that is exactly like mine and was pretty negative about it. She just *has* to have her own garage. And a balcony. And more than twice the square footage I have. So she leased the place, for over $1600 a month ($500 more than my budget allowed), which means her utilities will be higher too. To be fair she's canceling her gym membership and has been suggesting cheaper places to eat out lately.
Those are her choices. And I'm realizing that they aren't terrible ones. I was worried that there would be tension between us when I see her make choices I think she can't afford, or when she inevitably gets stressed about money due to a bad quarter at work. But then I realized that I am going to have to learn how to be supportive and help her in light of her choices and values rather than trying to mold my "ideal" budget to fit her lifestyle. It's her life and her income; she's trying to make her finances better, which is great.
It's not my place to take offense if she doesn't choose to take all my suggestions.