Living Margin Framework

The living margin framework is designed to simplify budgeting while ensuring financial stability and flexibility. Here's how it works:

  1. Financial Goals: 20%

    • Purpose: Allocate 20% of your income towards giving, savings, and debt reduction.

    • Savings: Build an emergency fund, contribute to retirement accounts, or save for specific goals.

    • Debt Reduction: Make extra payments towards high-interest debt to reduce overall debt quickly.

  2. Fixed Costs: 60%

    • Purpose: Use 60% of your income to cover all necessary expenses.

    • Expenses: Include housing, utilities, groceries, transportation, insurance, and other essential costs.

    • Living Within Means: This allocation helps you understand and live within your means, ensuring you don't overspend on essential expenses.

  3. Flexible Spending: 20%

    • Purpose: Allocate 20% of your income for discretionary spending or "fun" money.

    • Discretionary Spending: Use this for dining out, entertainment, hobbies, travel, or other non-essential expenses.

    • Balance: Ensures you have money left over for enjoyment, prevents feelings of deprivation, and makes it easier to stick to your budget.

Benefits of the Living Margin Framework

  • Moderation: Balances essential expenses, giving/savings, debt reduction, and discretionary spending.

  • Simplicity: Eliminates the need for detailed budgeting categories, making financial management less stressful.

  • Flexibility: Allows adjustments based on individual circumstances while maintaining overall financial health.

Implementation Steps

  1. Calculate Your Income: Determine your total monthly income from all sources.

  2. Allocate Percentages: Divide your income according to the 20/60/20 framework.

    • 20% for savings and giving.

    • 60% for living expenses.

    • 20% for discretionary spending.

  3. Track and Adjust: Monitor your spending in each category and adjust as needed to stay within the allocated percentages.

By adopting the 20/60/20 Living Margin framework, you can achieve a balanced and stress-free approach to budgeting that supports your financial goals and provides some enjoyment along the way.

One-Time Setup for Personal 

Here's a breakdown of the one-time setup for managing your personal finances:

Step One: Set Up Two Bank Accounts with Your Current Personal Bank

  1. Checking Account 1: For Fixed Costs

    • Income: Your salary or other income will be deposited into this account.

    • Purpose: This account will handle all your fixed costs, such as rent/mortgage, utilities, insurance, and other regular expenses.

    • Optional Use: You can also use this account for flexible spending, which may make budgeting more challenging.

  2. Checking Account 2 or Savings Account: For Financial Goals

    • Purpose: This account is dedicated to your financial goals, including savings, debt payments, and giving.

    • Transfers: A predetermined percentage of your income will be transferred or deposited into this account.

    • Emergency and Permanent Savings: This account will also hold your emergency fund and permanent savings.

    • Investment Allocation: Consider allocating up to 50% of the funds in this account to safe investments or tangible assets, such as retirement accounts, money market accounts, and gold or silver.

    • Optional Third Account: You can set up a third account to separate emergency savings from other financial goals.

Step Two: Set Up Your Flexible Spending Account at a Different Bank

  1. Flexible Spending Account

    • Purpose: This account will be used for flexible spending, such as groceries, dining out, entertainment, and other discretionary expenses.

    • Deposit: You will deposit a predetermined amount into this account, typically around 20% of your income.

    • No Budgeting: This setup eliminates the need for traditional budgeting methods like envelopes. Any leftover funds at the end of the month can be rolled over to the next month or set aside for savings and larger purchases.

Summary

  • Checking Account 1: For fixed costs and income deposits.

  • Checking Account 2 or Savings Account: For financial goals, savings, and investments.

  • Flexible Spending Account: Set up a discretionary spending account at a different bank.

By following these steps, you can simplify your financial management, ensure your essential expenses are covered, and make steady progress toward your financial goals without the hassle of detailed budgeting.

Monthly Personal Finance Tasks

  1. Deposit All Personal Income into Primary Checking Account

    • Ensure all sources of income are directed into your primary checking account.

  2. Review and Adjust Target Allocation Percentages

    • Periodically review your financial goals and allocation percentages.

    • Incrementally adjust percentages to meet targets as needed.

  3. Transfer Allocated Amounts and Pay Fixed Costs

    • On the 10th and 25th of each month (or when you receive income):

      • Use a budget worksheet or app to determine the allocated amounts.

      • Transfer these amounts to your additional checking or savings account.

      • Pay your fixed costs from these accounts without exceeding the allocated percentages.

  4. Manage Flexible Spending

    • After transferring to your financial goals and covering fixed costs, use the remaining balance in your primary checking account for flexible spending.

    • Optional Step: Transfer the allocated flexible spending percentage to a prepaid debit card to ensure you stay within the budget.

  5. Allocate Leftover Money

    • Assign any leftover money to a specific category, such as savings goals or debt repayment.

    • If cash flow is insufficient, analyze your budget to identify areas for adjustment or cuts.

Summary of Monthly Tasks

  • Income Management: Ensure all income is deposited into your primary checking account.

  • Budget Review: Regularly review and adjust allocation percentages to meet financial goals.

  • Scheduled Transfers: Transfer allocated amounts to secondary accounts on specific dates and pay fixed costs.

  • Flexible Spending Control: Manage discretionary spending within allocated limits, possibly using a prepaid debit card.

  • Leftover Allocation: Assign any remaining funds to savings or debt repayment, and adjust your budget if needed.

By following these monthly tasks, you can maintain control over your finances, ensuring you meet your financial goals and manage your spending effectively.

Personal Planning Tips

  1. Avoid Making Decisions Based on Your Best Financial Months

    • Recognize that until your best month becomes your average, it's the exception, not the norm.

    • Basing decisions on exceptional months can lead to running out of cash quickly.

    • Use Percentages: They are based on actual, consistent results, helping to create a more reliable financial plan.

  2. Year-End Contributions

    • Plan to contribute to your holding or retirement accounts at the end of the year.

    • Consider making extra payments against your debt during this time.

  3. Debt Reduction Strategy

    • Spend Less Than You Make: The fundamental formula for reducing debt is consistently spending less than your income.

    • Enjoy Saving: Find more satisfaction in saving money than in spending it. This shift in mindset can significantly impact your debt reduction efforts.

Summary of Personal Planning Tips

  • Financial Norms: Base your financial decisions on consistent, average months rather than the best ones.

  • Percentage-Based Budgeting: Utilize percentage-based budgeting to ensure your financial plan is grounded in actual results.

  • Year-End Contributions: Make year-end contributions to boost retirement accounts and pay down debt.

  • Debt Reduction Formula: To effectively reduce debt, focus on spending less than you earn and derive enjoyment from saving.

Following these personal planning tips, you can create a sustainable financial plan prioritizing stability, debt reduction, and long-term savings.

Enhancing Your Living Margin Framework

As you become more disciplined in managing your cash flow, mainly by decreasing your fixed costs, you can adjust your allocations to meet your financial goals better and increase your enjoyment. Here's how you can enhance your 20/60/20 framework:

  1. Reduce Fixed Costs

    • Identify Savings: Find ways to reduce essential expenses such as housing, utilities, groceries, and transportation.

    • Optimize Bills: Negotiate lower service rates, switch to more cost-effective plans, and eliminate unnecessary subscriptions.

    • Efficient Living: Adopt energy-saving habits, often cook at home, and consider alternative transportation methods like biking or public transit.

  2. Reallocate Savings from Fixed Costs

    • Increase Financial Goals Allocation: As your fixed costs decrease, you can allocate a significant percentage of your income towards savings and debt reduction.

      • New Allocation Example: If you reduce your fixed costs to 55%, you could allocate 25% to your financial goals.

    • Boost Fun Money: Alternatively, if you’re comfortably meeting your financial goals, you can allocate more to your flexible spending to enhance your quality of life.

      • New Allocation Example: If you reduce your fixed costs to 55%, you could allocate 25% to flexible spending.

  3. Adjust and Monitor

    • Regular Review: Review your spending and allocations to ensure they align with your financial goals and lifestyle.

    • Flexible Adjustments: Adjust as needed based on changes in your income, expenses, and financial priorities.

Example Adjustments

  1. Reduced Living Expenses to 55%

    • Original Allocation:

      • 20% for Financial Goals (Giving & Saving)

      • 60% for Fixed Costs (Living Expenses)

      • 20% for Flexible Spending (Discretionary)

    • Adjusted Allocation Options:

      • Option 1: 25% for Financial Goals, 55% for Fixed Costs, 20% for Flexible Spending

      • Option 2: 20% for Financial Goals, 55% for Fixed Costs, 25% for Flexible Spending

  2. Further Reduced Living Expenses to 50%

    • Adjusted Allocation Options:

      • Option 1: 30% for Financial Goals, 50% for Fixed Costs, 20% for Flexible Spending

      • Option 2: 20% for Financial Goals, 50% for Fixed Costs, 30% for Flexible Spending

      • Option 3: 25% for Financial Goals, 50% for Fixed Costs, 25% for Flexible Spending

By consistently managing and reducing your fixed costs, you can allocate more to savings and investments or enhance your lifestyle with increased discretionary spending. This approach not only helps you achieve your financial goals but also makes the process of managing your finances more rewarding and enjoyable.