The Problem with Social Media Financial Spending Plan

Conscious Spending Plan, as defined by Ramit Sethi (renowned financial author) is a short-form financial plan that accounts for savings while indulging in guilt-free spending. With that, his aim is to decouple the notion of money as either being rigidly disciplined vs living in the moment.

“…It is all about spending extravagantly on the things you love, as long as you cut costs mercilessly on the things you don’t. It’s not about restriction. It’s about being intentional with your money and then spending on the things you love guilt-free.”

Ramit remarks that the plan is rewarding because you get to CHOOSE how you want to spend your money AND how to live your Rich Life. He also warns us not to get hung up thinking too hard about what goes where or if our numbers are exact. The general idea is to get close to the estimates, implement your plan, and adjust as needed

The Conscious Spending Plan breaks out into four main buckets:

Fixed Costs (50-60% take-home pay) – any basic expense that any ordinary person would use to live
Investments (10% take-home pay) – any long-term investment
Savings (5-10% take-home pay) – any short-term, midterm, & longer-term savings goals
Guilt-Free Spending (20-35% take-home pay) – what you have left over for FUN money, for ANYTHING you want to spend on, guilt-free

Table of Contents

So what’s wrong with this spending plan?

There is no end to the reductionist finance-to-wealth approach on social media.

With so many quiet-quitting in 2020 to start a podcast or YouTube, the market was foaming for “prosperity gospel”. It is still very difficult to get the legion to slow down and process the numbers. As of 2023, I can say with confidence, “Social media mentorship is not the way.”

Please don’t quit your day job.

Without a plan, this can wipe out nearly 3 years of wealth-building. And, don’t withdraw from your 401(k) to jump into an infinite back-alley banking scheme (that only the rich supposedly know). You will only end up penalizing yourself nearly 20% for early withdrawals while locking in paper losses. On top of that, they only give you access to 80% of your own money. The math doesn’t math, as they say.

Basically, you need to approach everything with a critical eye because your time is money. Your attention is a commodity, everyone is selling merch or concepts. That’s where the money is; and, likely where your money went.

The Good and the Bad

I will start that praise where Ramit’s plan is.

Overall, it shines with all the millennial soft life aesthetics. It feels good and looks simple. The best part is that it recommends nearly 20% in savings through retirement accounts, for emergencies, and even for one-time massive spending challenges such as down payments.

Despite the significance of having savings, research found that 45% of Americans have less than $1,000 saved.

In most situations, $1,000 is not enough. Even car tires can run you nearly $2,000. On average, urgent care visits cost between $100 and $200. ER visits can cost upwards of over $1,000 a visit, with an average visit costing between $1,200 and $1,300. The average cost of an air conditioner (AC) repair is between $150 and $650. However, the cost can range from $100 to $4,200 depending on several factors. So on and so forth, all to say, you really need more than the old $1,000 cushion.

The goal should be closer to six months of expenses, or at the very least $2,500 per adult in your home. Throw in an extra $5,000 per child under the age of 24. With Ramit’s plan, the median household should add nearly $7,500 annually to their coffer. If everything remained constant, that home would have a total of $1.9M in total investments if compounded at 8% over 40 years.

Refer to the US Census Bureau’s 2022 Real Median Household Income of $74,580.

Adjust as needed, the Fixed Dilemma

That’s a good thing, right? Unfortunately, people’s taste and conception of Needs vs Wants is subjective. Therein lies the issues.

Your financial plan is personal to your situation. This includes the amount of money you make, the debt, your obligations, and even your family background. Thus, financial planning cannot be generic. It has to be custom-made.

Most people fall for the Fixed Dilemma, wherein they start to warp very real wants into perceived needs. For example, do you really need to stay in the city? Or, do you merely want to be close to the action?

I know a lot of people who stretch their funds to meet their lifestyle. Often making statements like “I need to dress the part for work” or “I worked hard and should enjoy the finer things”.

Not too long ago, I watched someone on social media tout that cooking is for suckers. His argument is that most people are wasting time, money, and energy that they could simply order in. It’s definitely not a great savings strategy. All to say that most Americans are burning nearly 77% of their income after tax, leaving less than 8% for savings.

Let me spell it out for you, 50%-60% fixed costs plus 20%-35% guilt-free expenses equal 70%-95% of your monthly income evaporated. This is why it’s known as a burn rate. You will literally burn through your savings contributions without knowing.

The Real Conscious Spending

To be really conscious about your spending is the master key to wealth. It’s not about guilt-free spending.

Instead, your goal is to challenge the notion of spending while living intentionally. When I started comparing Ramit’s plan with other plans available, I found that it would take nearly 40 years to be able to retire comfortably.

If you want to succeed, Saving/Investing first should be MANDATORY. This will help you avoid the Fixed Dilemma. You have to learn to navigate with the remainder and/or become motivated enough to earn more.

With more families’ retirement savings falling behind, this guilt-free living standard is robbing a lot of people of their future. According to the Joint Economic Committee, only 35% of Americans between the ages of 55 and 64 have a pension or retirement savings.

The current average retirement income for US adults aged 65 and older is $75,254. Americans will have to cope with an average monthly retirement income that’s less than $5,000 with Social Security income covering less than $1,750.

Why is that a problem?

According to the US Bureau of Labor Statistics, a household run by someone 65 or older spends on average $52,141 per year (approximately $4,345 a month). As prices climb 3%-9% year or year, most people will find themselves underwater.

This is not an indictment of Ramit’s plan but some caution tape around the perceived soft life adaptation of financial plans. You can live a more fulfilling life, however, try not to conflate the need to have a wants category as a priority.

I can promise you that if you do what you need to do, all your wants will fall into place. Bonus, anytime you see +20% guilt-free indulgence, think about it as a tax on your future.