Defining "The Gap"

In terms of Personal Finance, “The Gap” has nothing to do with the global retailer. It just seems that a number of us are going to think about it anytime I reference “The Gap”, so we might as well get it out of the way.

When I wrote about Calculating Your TRUE Financial Health, I mentioned three things that I felt were required for a sustainable life. Spend less than I make, have a work/life balance, and create “The Gap”. The Gap is the positive difference between your income and your expenditures. There is no Gap if you are spending more money than you have, and if you are relying on credit or your savings to do so. That is not a gap, that’s a chasm. There is no minimum difference required by The Gap. The Gap, for some of us, could be as small as $5, or as large as $5000. The Gap does not discriminate based on earnings. The Gap is simply a buffer between how much money you have and how much you have to spend.

What do you do with this extra “Gap” money? Well, that depends on you and your budget. Some people consider this “burn” money, that they’ll reward themselves with after a month of hard work, and others will put every dime into savings and investments. I recommend a bit of both.

The best way to determine a healthy Gap is to look at the percentages. How much of your income is already allocated to expenses? If your monthly expenses are 95% of your income, then your Gap would be 5%, a dangerously low number. If your monthly expenses are only 30%, then you could say that you have a Gap of 70%. Simply look back over your monthly spending record and compare that against last month’s earnings (expenses / income x 100 = %).

In some personal finance circles, The Gap becomes a source of pride – a financial parade around town. The point of The Gap is not to be able to brag how low your monthly expenses are, or how much of your income you can put away and save. The point of The Gap is to create a financial life without stress or strain, and in order to do that, there needs to be some breathing room. That’s what The Gap is all about. That is why we should pursue one.

What is A Healthy Gap?

If your monthly expenses are 95% of your income, then you have a very unhealthy gap. There is simply not enough room for errors, emergencies, splurges, having fun on the side, etc. If every single one of your income dollars is going to pay the bills, then you have a problem. For some of us, that is simply reality. We just cannot make enough money, and our past indulgences require repayment. For those of us that struggle with debt, we cannot afford a gigantic gap in our finances, as we’ve already spent that money. Its already past time when we should have paid it back.

However, I would also dare to claim that having too large of a Gap is unhealthy as well. I know of some people who try to get by on less than 50% of their income, choosing to put the rest into investments, or savings. While this is definitely a probable life, I feel as though it is for those that are lucky enough to enjoy living without high cost of living expenses. Whether that’s a choice or by default location, some people simply have to pay more to live every month than others. Regardless, I feel as though it is unhealthy to stretch your budget thin just in order to put a few more dollars aside for a rainy day.

So what’s a healthy percentage? I think that it is going to depend on each individual, couple, or situation, but I think that somewhere in the 15-25% range should be a healthy Gap. At that point, there’s more than enough room in case something goes over budget or unexpectedly arises, and at the same time, that is a fairly hefty chunk of change to put into the bank every month.

What’s your Gap like?