Incomes vary—but so do spending habits. Even if you earn a huge salary now or in the future, if you don’t learn how to budget your paycheck responsibly, you may never achieve financial freedom.
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But let’s face it: Budgeting isn’t easy. Juggling your needs (home costs, transportation, groceries) with your wants (entertainment, vacations, eating out) is a constant challenge. Plus, racking up charges on a credit card for things that you want right now is often a lot more tempting than saving for the future.
But it’s important to take a monthly snapshot of your budget to make sure that you’re on the right track. As you'll see, that’s exactly what we asked a family of five, a single woman—and even me and my husband—to do.
To determine if we're all on the best financial course, we also asked Stephany Kirkpatrick, a CFP® with LearnVest Planning Services, to weigh in on what we’re doing well—and how we can boost our budgeting even more.
Jane Bianchi, 30, and Bill McGibony, 29
Occupation: I’m a journalist; Bill is a software consultant.
When we take the time to actually sit down and do the math, I’m delighted to see how much we are saving—buying a house and a car within the next few years are top priorities for us, so we’ve been socking away as much as we can. I’m also glad that we stopped paying for cable TV, and bought a $20 antenna for network shows—since we mainly watch Netflix, it was a waste of money. We also cut corners by avoiding gym memberships, and instead running in the park and doing exercise DVDs indoors. And we’re also very lucky that we have no student loans.
It does pain me, however, to see how much we pay in rent. Living in New York City certainly isn’t cheap, but it would be possible to find a more affordable place. If the money were going toward a mortgage, which is an investment, I wouldn’t worry about it. But when we rent, we feel like we’re just throwing our money down the toilet. That’s a big reason why we’re trying to buy real estate as soon as possible—we just can’t afford the down payment yet.
Looking at our budget, I also notice how we could spend less eating out for lunch and dinner. We’re on-the-go so much that’s it’s all too easy to grab a slice of pizza on the way home from work or order an appetizer when we’re at happy hour with friends. If we cooked more, and brought leftovers to work, we could save a lot more.
What Stephany Says: Holy savings, Batman! This is fantastic. Many New Yorkers find it hard to save money, so I’m thrilled to see that Jane and Bill are setting aside funds for future priorities—they should just make sure that part of this money goes toward an emergency fund and that it’s not all allocated for a house and a car. Trust me, the minute you drain your savings to buy a home, an emergency will come along—it’s Murphy’s law!
RELATED: 7 Reasons You Need an Emergency Fund
Although it's an area that concerns Jane, paying 28% of your income for rent in the city actually isn’t too bad. Their overall essential expenses (housing, utilities, transportation and groceries) are under 40%, which is less than the 50% we recommend. Keeping these costs low means that they have extra room for savings. So even though she feels like they're “throwing money away” on rent, they likely wouldn’t be able to buy a similar place for the same monthly payment, especially when you figure in property taxes, insurance and maintenance costs.
Setting aside a portion of your income for non-monthly expenses, like gifts and travel, is a good idea for anyone. You can do this by setting up a “personal escrow” savings account for such things. Jane and Bill should take a look at a calendar and map out planned expenses for the next year. Once they have this ballpark amount, they can divide it by 12 to figure out how much they need to set aside in a separate account each month to pay for these anticipated expenses.
The Family of Five
Jennifer and Christopher, 32, and their three young kids
Location: Downingtown, PA
Occupation: Jennifer is a stay-at-home mom; Christopher is a nurse.
Jennifer and her family live solely on Christopher's salary, so she watches every penny, cutting corners wherever possible. One way she saves: bundling the phone, cable and internet bills because it’s cheaper than paying for each service individually. “I’m also conscientious about turning off lights," she says. "And the AC is set to 78 in the summer, and the heat doesn’t go over 65 in the winter. It’s either warm or chilly in the house, but the kids don’t know the difference.”
She’s also creative when it comes to entertaining the family. Instead of spending big bucks on movies, restaurants or theme parks, Jennifer takes advantage of the outdoors. “We go to all the free, local parks to run, bike and hike," she says. "And there are often festivals or parades downtown that are free too.” The family also has an annual museum membership that gives them access to multiple museums within driving distance—and they cook pizza together every Friday night.
But some costs are nonnegotiable for the family. For example, Christopher has to drive over an hour every day for work, which sucks up a lot of gas. (He hopes to get transferred to a hospital that’s closer to home.) And Jennifer insists on buying mostly organic, all-natural food for the kids—no matter how expensive. “I’d rather pay the farmer than the doctor," she quips. "I think it will help us save in the long run!”
What Stephany Says: Their mortgage is high, relative to their income, especially since they live on one paycheck. Typically, I like to see this number at 28% or less. If they qualify for a refinance, today’s low rates may benefit them, allowing the couple to reduce their monthly payment.
Generally speaking, spending about 50% of your take-home pay on essentials (housing, basic utilities, groceries and gas) is a good rule of thumb. But this family is spending 48% of their budget on housing and food alone. Even though Jennifer is conscious of her family’s grocery bills, I’d encourage her to look at more ways to save, such as community-supported agriculture shares and sites like savings.com. Christopher can also look into ride-share programs or carpooling—even if he drives to the hospital one fewer day a week, it could have an impact on his budget.
It is, however, reassuring that Christopher’s employer matches his retirement savings. And Jennifer’s diligence in finding free entertainment options, and keeping discretionary costs low across the board, is admirable. She’s setting a great example for her children that you don’t have to spend a fortune to keep up with the Joneses. I also love the fact that they’re able to save 4%, even though their budget is tight. Many people forgo things like savings, but the old adage of “pay yourself first” is good advice—no matter what your income.
The Single Professional
Erinn Harris, 32
Location: Alexandria, VA
Occupation: High school teacher
“I’m a bit of a financial wreck,” says Erinn. “I love socializing and eating out. And when I’m at a restaurant, I’m going to skip the salad and get the thing that looks the best on the menu instead—and wine.” Erinn also recognizes that she doesn’t need the monthly health massage that she splurges on.
But what makes Erinn especially nervous is that she’s racked up debt on three credit cards.The total? It's more than three times her monthly income. “It’s something that I know I should think about, but I don’t. I could probably make way bigger credit card payments, but I’m reluctant to give up my lifestyle. I’m probably still paying interest on the time that I bought Chinese food eight years ago!”
She also has no savings. “I know that I need an emergency fund—if something were to happen, I’d be screwed,” she admits. That said, Erinn is trying to be more financially savvy in one area of her life: Now that she's planning to go back to school to get her master’s degree, she's putting any extra money that she saves toward tuition. “I don’t want to take out another student loan because I’m already paying off three of those,” she says.
She attributes that ability to save for school to her smart living situation. “I'm near D.C., where the cost of living can be sky-high," she says. "I’m glad that my rent and bills are very low because I live with roommates.” She's also been wise to evenly distribute her salary throughout the year, so that she doesn’t have to scrape by come summer when she isn't collecting a paycheck.
What Stephany Says: It’s awesome that Erinn is setting aside funds to help her through the summer—so many teachers leave it up to chance, hoping that they’ll have supplemental income. And keeping her rent and utility costs low by living with roommates is a fantastic way to free up cash flow for other priorities.
Between retirement, credit card payments and student loans, Erinn is putting 25% of her take-home pay toward financial priorities. This is a great percentage of her income, but I fear that since she doesn’t pay much over the minimum balance on her cards, the accrued interest over time means that she won’t be making much progress. Given that she already knows her splurge areas, I’d recommend a cash-only diet for such things. She'd give herself a weekly cash “allowance” for everything that isn’t a fixed bill by tallying up the monthly figure and then dividing it by four. Once that weekly allowance money runs out, no more fancy dinners!
Erinn should also really save up an emergency fund before she starts saving for tuition, which means getting her master’s degree may need to be delayed. In the meantime, she should look into any and all opportunities for tuition reimbursement that might be available to her as a teacher.
LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. The people quoted in this piece are not clients of LearnVest Planning Services.