In the previous post we learned that the tax man and personal benefits (insurance, retirement savings, etc.) significantly reduce the amount of money we actually see in our paychecks. We also committed to setting aside 20% of that paycheck for savings and investment, knowing that it will lead to prosperity down the road.
Now, you have one last broad stroke to apply as you work toward building a budget. I suggest you also set aside up to 15% of your take home pay for “Fun ‘n Games.” These are the discretionary expenses of the Cash Flow equation from a few posts ago. Discretionary expenses are for things like vacations, dining out, internet service, cell phone, Netflix, TV, gifts, etc. They are things you want and experiences you enjoy having, but you don’t really need them. You spend on them…at your discretion.
And that’s it. What is left over is what you have to “pay the bills.”
Pay Yourself First!
Notice that we’ve set aside the money for savings / investment and fun ‘n games first, and then backed into how much is left for paying required expenses.
This done on purpose and there are some valuable mindset adjustments that occur from this approach. The most important of course is that you’ll default to a mode of “auto-saving” – paying yourself – first. Stockpiling this “savings energy” for use later in your Money Marathon will be a big advantage.
Since you’ve also set aside a decent chunk of change for discretionary expenses up front, you won’t feel like you are forcing yourself into a spartan existence with no fun either. When you get right down to it, you are sorta paying yourself with some of this money too. Money spent having a good time with friends ‘n family and building great memories is also money well invested.
Pay Others Second
Now that you’ve paid yourself, you can start to divvy up what’s left for required expenses – but exactly how much will go to housing, groceries, transportation? Ugh. I hate to say it, but….it depends. Here’s a few factors that will influence how you ultimately carve up what’s left:
- Where you live (big city or small town, downtown or suburbs, etc.)
- How closely you live to work, and the “walkability” of where you live?
- What you do for a living (need nicer work clothes or shorts & tees are enough?)
In reality, there are numerous factors that make it nearly impossible to figure exactly how much you’ll have to spend on each category right now, so I won’t try. That will come when you graduate, find employment and decide where you’ll live. For now, I’ll just give you some general guidance and provide an example of a simple budget following our $50K/yr average college grad salary. I won’t go into every line in detail, but notice that budget shows both your gross (before taxes, benefits) and net (after taxes, benefits) income, as well as a sample of how you might distribute your take home pay for your expenses. Take a look:
As a smart Money Marathoner, the first thing you did with that $2,752 in take home pay was automatically divert 20% of it to savings for investment, and then you allotted yourself up to 15% of it for Fun ‘n Games. In practice, the $413 for FnG gets carved up into multiple discretionary expenses (vacation fund, dining out, entertainment, gifts, etc) but because none of them are absolutely necessary, it’s only important to note that you want to have the discipline to keep these expenses within your allotted amount each month. From there, how the FnG money get distributed exactly depends on what is most important to you.
What’s left is used to pay for the Imperatives.
Again, I won’t go into the detail of each line, but you can see the “biggie” categories and the percentages of your “Pay Others” budget allocated to them. The %’s are just general recommendations, not hard ‘n fast rules. For example, you might spend a little more on your housing in order to live some place where you can walk to work, shopping and entertainment, which will reduce your transportation costs. Or, maybe you figure out that your employer will pay for your cell phone each month, and you really don’t need cable TV, and you don’t eat out that much, all of which allows you to cut your FnG expenses down by $100 a month. You might divert that $100 to savings, or you might need it to help pay for housing and groceries because you live in a more expensive area.
The point is, there’s some flexibility in any budget. The only hard and fast guidance you don’t want to break if at all possible is 10% pre-tax savings and 20% take-home pay savings.
One final observation on the sample budget is to take note of the last item in the expenses category: “Misc or added savings.” It’s value is to offer you a little flexibility – a buffer – in any month to spend a little more on any category as needed, or it can be used to turbo boost savings in months where you were able to keep expenses in check. It can even be used to treat yourself to something nice for being such a disciplined Money Marathoner (it’s OK…I’ll allow it).
At it’s simplest, building a budget is really just knowing how much is coming in, committing to pay yourself 1st, and then tracking how you spend the rest of your money every month. The good news is there are lots of tools out there to help you build and stick to a budget. Many banks offer free software tools for basic budgeting when you have an account with them. Other tools like Mint, EveryDollar, and YNAB are more powerful, though sometimes come with a cost. There are plenty of others. How ever you choose to track your budget, remember to stick with the mindset adjustment that comes from the “Pay Yourself 1st, Pay Others 2nd” mentality and always be a bit picky-choosy about how you spend your money. Not only will you end up finding good pricing on the goods and services you buy, but you’ll go a step further to determine whether a purchase is needed (required expense) or wanted (discretionary expense) and if you might just be able to just do without it entirely for now.
Building this kind of awareness about your cash flow and having a willingness to forego expenses now for your long-term wealth is a big help in the Money Marathon. This might seem like a burden you don’t want right now, but while many of your friends with new degrees and their 1st real jobs will be spending every dime they bring in (and more, if they get themselves into credit card debt…our next topic), your commitment to paying yourself first and being careful about what you spend your money on will ensure long-term success.
The Money Marathon 