Are you mindful with your money? Do you know where you spend it? If you don’t, you may benefit from the Presence Process of Money.
Recently I read this really interesting article by Sarah Newcomb, Ph.D., a behavioral economist and author for Morningstar.com. In it, she describes how to use your Golden Ratio for personal finance to figure out how you spend money or budget.
What’s a Golden Ratio?
A golden ratio is the percentage of your spending that goes toward past, present, and future expenses. Spending money on the past is paying for things you already did or bought. Think debt. Present spending covers your current lifestyle. Future spending is savings.
The First Ratio – Debt
Ideally, you should be spending less than 36% of your income on debt. Housing debt should be less than 28% of your income. Consumer (credit card) and housing debt should be less than 36% of your income.
The Third Ratio – Saving
How much you save depends on your goals. If you’re looking to retire, research shows that you can save a little as 7% if you start as early as 25 and retire as late as 70. You might need to save as much as 65% if you start at 45 and want to retire at 62. Again, this all depends on you goals. But a general rule is save at least 10% to 15% of your income. I try to save 25%.
The Second Ratio – Present Spending
Current expenses make up your second ratio. Ideally you’d spend most of your money here. Think vacations that you pay cash for.
What is the Presence Process of Money?
The Presence Process is a book about a spiritual process that I completed years ago. The author, Michael Brown, created this process to integrate unsettled emotions from past traumatic events in your life. It’s a combination of breathwork and mantras that help you become more present and authentic.
The presence process of money is my spin on Michael’s process. It’s simply bringing awareness to your spending ratios and aligning them with what makes you happy. The goal is to hopefully be more present with your spending. Sarah Newcomb doesn’t suggest an ideal golden ratio, so I will.
Your debt ratio should be less than 36% – moving to zero by retirement. My most successful clients have a debt ratio of zero. They don’t have mortgages or car payments and they pay off their credit cards every month. This isn’t realistic in your 20s or 30s. But it should be the goal. You can do this by paying off your mortgage faster and paying cash for cars. Of course, don’t carry credit card debt.
Your saving ratio should be 10% in your 20s. If you start in your 30s, save 20%. If you start saving in your 40s save 25% and plan on retiring at age 70. A good financial plan will let you know specifically how much you should be saving. But these are good starting points.
Your present spending should be 50% plus, for the simple reason that it means you’re spending presently.
Do you know your golden ratio? Last year mine was 6 | 41| 33. I’m probably saving too much. But that makes me happy. When you know how much you’re spending on the past, present, and future, you can make conscious choices to be more present with your money. I call this the Presence Process of Money.
For more on this subject check out:
- This Budgeting Trick Can Help With Your Financial Goals by Sarah Newcomb at Morningstar.com.
- How Much Should You Be Saving? at ThinkingBeyondNumbers.com.