If you ask most people, they'll probably say that budgeting isn't terribly titillating ... unless, of course, we're talking about someone else's finances.
Let's be honest: Although you may not want to fess up to just how much of your monthly budget you blow on eating out each month, it's easy to judge the bad spending habits of others—like the next-door neighbor who just bought a second set of pricey wheels.
Yes, there's nothing like financial voyeurism, which is why we convinced three brave people, whose annual household incomes come in at around $70,000, to share the details of their monthly spending—and saving—habits.
And we do mean every detail: Each intrepid participant divided his or her budget into percentages, which were then color-coded in line with the 50/20/30 rule. The rule recommends that you allocate 50% of your budget for essentials (housing, transportation, utilities and groceries), 20% toward financial priorities (retirement contributions, savings, and debt payments), and the remaining 30% for bonus (read: fun) lifestyle expenses.
We then asked Nancy Anderson, a CFP® with LearnVest Planning Services, to review each budget to see how they are mastering their money—and where there's room for a little financial improvement.
Dave, 42, Civil Engineer
I recently got a new job after being laid off earlier this year, and while I’m happy to be back at work, I had to take a pay cut in the process. My wife and I have two kids under the age of 12, so she works part-time as a teacher’s aide here in Utah. To keep our costs in check, she’s been great at reexamining our budget recently, and we’ve made cuts where we can. For example, she stopped going to Pilates, and I canceled my cable TV subscription to NFL RedZone—as much as it breaks my heart!
I’m also tempted to remortgage our home, but we’re on track to pay it off right before my daughter goes to college—and I know that I’ll need the extra money more then than I do now. But I do worry about costs as my kids get older: Between my 12-year-old wanting to do nothing but shop, and my 8-year-old boy going through a growth spurt like every other week, it seems like we spend all of our money on clothing.
Luckily, I was able to contribute close to 50% of my paycheck to my 401(k) before we had kids, so even though I know it’s not the smartest move, I’ve scaled back on my current contributions. Maybe as the kids get older, my wife can start working more, but for now, we’re making it work.
What Nancy Says: Congratulations to Dave for finding a new position in a tight job market! And they're doing a good job of still saving almost 10% of their income—even with a pay cut.
But instead of refinancing or cutting too far back on his retirement contributions, Dave should consider reducing even more of his family’s regular recurring expenses, like he did with the NFL channel. Do an energy audit. Set up a clothing swap with friends who have kids around the same age. Consider a ride share to reduce overhead. Dave has a great start for retirement, but he should be careful not to borrow from tomorrow for today. He can start by bumping his contributions to his 401(k) at least up to the match, and then increase it incrementally from there.
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