The big day in this instance was the birth of our daughter. It’s one of many big days and it works no matter what your ‘Big Day’ is about. My idea of budgeting is to keep it as simple as possible because I’ll stick with it if it’s easy. No point in creating a complicated spreadsheet and debating what category expenses fall into. I’m not a business and if I wanted to do something as mundane as number-crunching then I’d go to school to become an accountant and get paid for that headache.
Think of the 50/30/20 budget as if you were paid in cash and you sort that cash into three envelopes. If you are familiar with the envelope method of investing, it’s where you write Rent on an envelope and put the cash for rent in that envelope. Using that method, you can end up with a lot of envelopes and might as well use a spreadsheet to get organized.
Keeping it simple let’s label our three envelopes Needs, Wants, and Impulse Buys. In other words these categories are:
– Stuff I’m required to spend money on.
– Things I would like to spend money on.
– And things I can just blow money on.
The order is important, because if the first envelope is empty (the ‘needs envelope’) then it pulls from the other two. The last envelope (‘Impulse Buys’) never pulls from the first two.
50% of Income for Needs
You have to be honest about what is a need. A place to live? Yes. Rent or Mortgage that eats half your salary? No. I am a fortunate to have a wife who is okay with us living below our means. If we had bought the house we could afford, that would our entire existence-affording a house. Apply the same rule to transportation. I drive a 2004 Nissan Sentra that was supposed to get my through college, which it did. Superficially it has seen better days, but it still runs and for that I am very grateful. My wife bought her own car a fews years back anticipating that we would someday need a better option to cart around future kids, so it’s not like we are misers. We have a nice affordable car when we need it. I didn’t need a new car when I left college.
I need running water. I need to heat and cool my home. Needs by their very definition mean that to attempt to live without them would be very difficult if not impossible.
If you cannot live on 50% of your income, there are three solutions.
1. Cut your spending on needs.
2. Increase your income.
3. Borrow from the other two categories, which is what most people do and why they feel like they never have money.
30% of Income for Saving and Investing
The 50/30/20 rule calls for 30% of income to go to wants and 20% to go to savings, but this is where I diverged. My savings account not only protects my family in case of an emergency, it also goes toward futures wants. I am more motivated to save money if I know I can buy the things I really really got to have in the future.
Most people are familiar with the idea that an emergency savings account should have three to six months of living expenses in savings. If you can do that you are definitely winning at life, but economists Emily Gallagher and Jorge Sabat suggest that may be too much. They suggested that there is not much benefit to having more than $2,467 in savings. Anything more than $2,500 I invest it and add to my IRA.
And if you are about to have a baby, just go wild with the savings. I had nine months to prepare and in my terror that we would be penniless for the rest of our lives I spent next to nothing in wants. Which I am glad we did because our daughter was in the NICU for nearly three months and I took off over a month from work to be there with her and my wife.
20% of Income for Impulse Buys
This is my favorite part. I have given myself permission to spend this portion of my income on whatever the hell I want. I use a free app called Pennies. I only use it to manage the 20% of my income that I can spend on whatever, which isn’t much, but for each week that I spend less it rolls over into weeks where I might want to spend more. For example if I wanted to buy this modestly priced turntable I’ll have to forgo spending money on dumb crap for a couple weeks. The result is guilt free spending.
My needs are covered by the first half my paycheck. I don’t spend a lot of time worrying about getting hit with unexpected expenses because I have an emergency savings. Thus making my life, finally, a life where I am not living paycheck to paycheck. I won’t lie, it took some time to get my finances in order, but I was able to do it. And it paid off big when my daughter was born. I am so grateful that I was able to take time off work and be in the NICU with her and my wife and not worry about money.
You can read more about how we saved money buying the things we needed for the baby on my wife’s blog.