It’s been awhile since our last “Money Monday” so we thought it was time for another one. This time around, we decided to pop on over to our friend Michelle’s page at Simplify, Live, Love to give her fans a pep talk since they just completed a 30-day Spending Strike for the month of January.
You know how after a strict diet sometimes people feel so deprived they quickly reward their behavior with that “side of fries” or a gooey cinnamon roll (or three)? I thought it was worth thinking about how someone might be able to “ease” back into a sustainable lifestyle after completing such an “Extreme Weight Loss” type challenge with respect to their budget.
The Bureau of Labor Statistics (BLS) finally released its 2012 Consumer Expenditures a few months back. I find this report interesting, albeit fairly esoteric. It’s interesting to see, for example, that spending on “Vehicle Purchases (Net Outlay)” increased a whopping 20%. Health insurance costs have increased 13% since 2010. And the average American certainly doesn’t set a good example, spending as much as he earns after taxes.
So, the question of the day is: “What’s the ideal way for me to allocate my spending?”
If you don’t already, start by tracking your spending (recall I like to use the “Three Card” system I outlined in Mindful Spending). It’s good to know what you have going on, ideally over the course of about three months, to get an average of what may swing from month to month. You have to know where you’ve been before you can decide which way you need to go.
Maybe it’s a targeted amount of savings each month, maybe it’s just a percentage reduction in spending overall. You decide where you want to be. If you don’t know where to begin, one popular rule of thumb is “50/30/20.” I didn’t invent this, but it certainly fits well with the “Three Card” approach. It is simple and flexible depending on your life.
Up to 50% of your after-tax take-home income is for necessities. This is a roof over your head and clothes on your back. This would include housing (don’t forget real estate taxes and homeowners insurance if you’re considering buying), utilities, basic clothing, transportation to work, some form of (at the very least catastrophic) healthcare insurance, childcare while at work, and groceries.
At least20% is for your financial security. Think of this as “paying yourself.” This is long term savings, any additional retirement savings not withheld from your paycheck (you should max out your 401k), and/or rainy day, need-a-new-roof savings. Debt payments would theoretically go here as well, if you have pesky student loans or a car payment, for example. Although, I would put any car payment above absolute necessity in the next “wants” category (you can see my monthly payment calculator here). This is what you get to keep of your hard earned money.
No more than 30% is for “wants” (e.g. my Amazon card in the 3 card system outlined in my Mindful Spending post). These are discretionary expenditures … as in, you have control over them. These can be fixed (cable, gym membership) or variable. I have heard these sometimes called lifestyle expenditures. Cable, movies, restaurants, extra babysitting, shopping, swim lessons for kids, etc. These are the last priorities in your budget. But the beauty is, as long as you have stuck to the first two categories, you will feel more satisfied with the purchases that fit in this category, knowing you have paid yourself first.
Before you make any big financial commitments, at least plug in the information you’ve gathered to see how your spending would measure up to this guideline (aka a “sanity check”). I sat down with a spreadsheet and did this when we were home shopping, and again when my husband was considering taking a new job with a different compensation structure. I have also run this spreadsheet to see what it would look like without my income (and thus less childcare).
And don’t forget to account for every cent. If you have some left over (bless your heart), it goes to paying yourself. And make it automated.
For example, a 50/30/20 budget for the average American household (per the BLS) with income of ~$65,000 (with no childcare), may look something like this:
How do I measure up personally? The last few months I’ve been running at approximately 65/15/20. Definitely not perfect. Working to get better over time. To be honest, this year is the perfect storm of childcare – 3 kids needing full time care. Hence I won’t be getting that new set of dishes I’ve been eyeing anytime soon. And I’ve been trying to avoid setting foot in Target or HomeGoods like the plague. But, I am happy to report the lunch share has helped significantly with the little restaurant budget (I used to grab lunch out quite a bit). Baby steps.
D.I.N.K. If you don’t yet have children (Dual Income No Kids), this is your time to focus, focus, focus on raking in the savings! If there may potentially be a “kids” scenario, the best advice (while not fun) is to run a few different spreadsheets. First, look at what your budget would look like on one income. You don’t have to necessarily live on one income while you’re still working, but any new FIXED expenses (i.e. new house) should fit with this potential scenario. Second, run it with two incomes, assuming you will stay working … but here’s the catch … research childcare in your area to find how much room in your post-baby budget you will have for a mortgage (FYI – my childcare expenses are larger than my mortgage payment). See what would be left in the room for housing and food. Yes, this may mean you don’t get your dream house (at least not yet).
See more drool worthy pictures of my dream house (aka Diane Keaton’s house) here or here.
I got a big raise, now what? Look at your raise vs. inflation. Your expenses are likely creeping up as well. Before you increase any fun spending, increase your pay to yourself, then the extra can go to housing and fun. Maybe take an extra vacation next year. But whatever you do, continue to evaluate potential scenarios (job change, lost job, etc). The last priority thing to increase would be any FIXED expenses (i.e. don’t run out and buy larger home, a new vacation home or a fancy car that requires a monthly payment).
The I-Just-Am-Cheap-About-Everything Person. Maybe this is you. Some people just try to spend less on everything. I personally don’t like that method, because I feel it is too restrictive and stressful. I think there is a balance between saving money and enjoying life. If you structure it right, and stick to your goals, you can ENJOY the fun money you have left over and not feel guilty about that pedicure or new purse, or my favorite … a vacation. If 50% of your income is covering the necessities, and you are saving enough, then I think you have every right to have fun and spend a little!
There are a million more life and family situations, on both extremes, that make these guidelines irrelevant. I cannot even imagine what it is like to try to support a family on minimum wage. To only allocate 50% to necessities would be extremely difficult in most major markets (even with SNAP benefits to cover some food expenses). Likewise, if you are a bazillionaire, you are hopefully spending way less than 50% of your income on essentials and hopefully you are saving and investing much more. No matter what, these things are universal … build a budget, and re-evaluate it continually as life changes.
And of course, continue to practice Mindful Spending!
I am by no means perfect at budgeting. If Suze Orman shadowed me for a day she would probably say, “GuurrRLFRIEND! You’re spending that kind of money on a CUP of COFfee? Arrrrh you kidding me!? Make it at HOME!” But if you’re just trying to be better at sticking to a budget, I may be able to help.
You already know I love spreadsheets. I used to have a spreadsheet for my budget. Color coded by category. And I was pretty good at tracking where my money went, exactly to the penny. But it didn’t keep me from SPENDING the money in the first place. If you want a copy of that spreadsheet let me know, but save some time and think about it BEFORE you spend it, not after. Let’s call it “Mindful Spending.”
I started this a few months ago and it seems to be working, so I thought I’d share.
My Three Cards
I have 3 cards that I use 95% of the time.
#1 Discretionary Card
This is the card that would include restaurants, shopping, home decor, etc. Anything that is not food, toilet paper, gas, utilities, basic clothing for the kids, medicine … you get the drift. I use my Amazon.com Visa for this because when I accumulate points it is a credit on Amazon, which I can use for a “freebie” discretionary purchase someday. Why-yes-I-would-like-another-new-cookbook-thank-you-very-much. I pay off this card every month in full (must say this so Suze doesn’t track me down).
Before you reach for this card, ask yourself a few questions. Is it really important to me? What’s the next best option, and how expensive would that be? Could I wait and buy it later? How much room in my discretionary budget do I have this month?
For example, if you’re on an airplane and are debating splurging on wi-fi … ask yourself what you’ll be doing online and if it in any way is something you won’t be able to do when you get home … did you forget to buy a birthday present for someone and you have to do it by midnight to avoid embarrassment? (e.g. Urgent) Are you swamped at work so you really need a few minutes to catch up on personal email or paying bills? (e.g. Important for sanity) Maybe this is a time to splurge. But if you are just bored and/or dissatisfied with the options in SkyMall (which is understandable, the number of cool gadgets has decreased dramatically in favor of pet staircases and yard fountains), maybe having to reach for the precious “discretionary” Visa will make you think twice. Maybe you could do some offline work, or you have a book you could read. I like to make shopping or to-do lists on airplanes when I am not traveling with kids … if I am traveling with the kids, the last thing on my mind is a wi-fi connection … booze maybe, but not wi-fi.
#2 Non-discretionary Card
This is the card that gets pulled out at the grocery, Target*, Costco*, the drugstore, the doctors’ office, and the gas station. Not a free pass to spend whatever (you still have a grocery budget) but this is not fun money. Pay off this card every month (again, I’m slightly scared of what Suze would do if I didn’t say that a bazillion times).
#3 My “Coffee” Card
Cue Suze: GirrrrrlFREND! You’re peeing your money away on COFFEE! Make it at home!
Sorry, Suze. I am saving for retirement like a good girl, and I haven’t bought a soda at lunch in years. And since having kids, my clothes are all from Kohl’s and/or “vintage” The Limited circa 2004 … so I get this one little thing. Half hazelnut half decaf with cream, please. Except on weekends, in which case home coffee is actually easier.
Card #3 is a gift card I either ask for as gifts (I got like 3 months’ worth at Christmas) or buy myself. When the money runs out for the month, so does the coffee. And then I have to drink burned-tasting jet fuel slash office coffee.
Whatever your daily splurge is, buy yourself a gift card once a month, and when it runs out, you stop. This may make you ration your spending. Downsize the cup or switch from a triple-sow-cow-skinny-extra-pump-latte (that’s a drink, right?) to a standard drip brew. Or don’t change your order, but just go less frequently.
That’s it. You know why it works? The mere thought of deciding WHERE something fits in the budget (by literally having to decide which card to put it on) makes me think twice about spending the money.
Mindful Spending 101
The beauty of the Mindful Spending philosophy is that it works for any budget. Whatever your category totals are, everyone has both discretionary and non-discretionary expenses. If you are in financial distress, you should simply not ever reach for that discretionary card.
There’s always fine print when it comes to money stuff. Here is more detail on how to deal with potential pitfalls.
Special Situation #1 – Target. Oh that glorious store with the bullseye. You will go in for toilet paper and leave with $150 worth of stuff. Guaranteed. Here’s how I handle that. I simply AVOID GOING. You heard me. Feet in the store or eyes on the website equals money spent (at least for non-perfect people). I set as many sundries to arrive on autoship from diapers.com (diapers, Burts Bees) or amazon.com (like my Method hand soap refills) or vitacost.com as possible. Going to Target is a quarterly event for me. I go for cat litter which is apparently too heavy for wag.com to ship cheaply. And since I’m there … well of course I browse the toys and games and DVDs. I chassé through the clothing and baby sections. I get things I don’t really need but can always justify in the tupperware and foil and cleaning supplies. And I always spend $150 on that trip. It’s really not that hard. So here’s the (slightly annoying) solution to this. Two transactions. Hold yourself accountable. Put the cat litter and toilet bowl cleaner on the Discover card and the other $138 worth of stuff on the Visa. Ignore the annoyed stares from the lady behind you muttering under her breath. And if she really carries on, dig through your purse as if you’re looking for some coupons … that might make her decide to switch lanes.
Special Situation #2 – Costco. See Target above. My only defense against this store is to go over my lunch hour with a list so that 1) I absolutely have to get in and get out in an hour round trip and 2) I know anything cold I buy has to get lugged up to the office fridge for the rest of the day. Plus, they only accept AmEx or debit cards, so my system doesn’t work. Just save your receipt and add it up by discretionary (10 lb. bag of chocolate covered pretzels) vs. non-discretionary (the wipes I went for in the first place).
Special Situation #3 – Amazon.com. See Target and Costco above. Only add the danger of being able to go in pajamas after the kids are in bed and have it delivered to your door in roughly 48 hours. I go to Amazon to look for hand soap and before I know it I have about 15 brown boxes on my doorstep. And the UPS driver definitely greets me by name. Repeat after me – Set necessities to autoship.
POINTS POINTS POINTS!! The reason I don’t do a “cash” basis/money in envelopes or use my debit card is points. I simply can’t stand to leave that money on the table. I strategize which cards give me best offers. Amazon’s Visa was a no brainer because I shop so much there (see #3 above), so the points rack up fast. Discover I like because there is no annual limit on cash back, and they run promotions like 5% back on gas or travel or home improvement (depending on the month). I feel like I have some sort of Ponzii scheme going when I accumulate enough Discover points from buying my monthly Panera gift cards to earn my free Panera gift card. Ok, I’m exaggerating I don’t spend that much on coffee at Panera … but you know what I mean.Something for nothing is nice(sorry Suze, I know you don’t like credit cards).
Autopay. Your credit cards should be set to autopay in full on their due date, so you don’t leave any of that up to chance (or in my case, are too lazy to have to remember to go log in and do it). I’m just going to say it one more time. Credit Cards Are Handy and They Give You Points but Thou Shalt Not Carry a Balance.
At the end of the month you can easily determine the spend on discretionary vs. non-discretionary categories without any complicated spreadsheets to see where your money went.
Plus, guilt free coffee. That’s right, you heard me … zero guilt.
Now, if you need help setting the budget in the first place? Stay tuned, that’s another post.