(Silence. Crickets chirping.)
Yeah, I thought so.
One of the most overplayed pieces of financial advice is “make a budget.”
There are a small handful of nerds who jive with this idea. You dig data. You love crunching numbers. Good for you.
Budgeting is a great tactic for people who stick with it.
The problem is, most of us don’t stick with it.
And there’s good news: We don’t need to.
Budgeting is tedious and time-consuming. I’m a finance enthusiast, and even I think that budgeting is arduous, so I can only imagine how “normal” people must feel.
We all know that we “should” budget. That doesn’t change anything. There are many things we “should” do. We “should” drive the speed limit. We “should” wear sunscreen every time we leave the house. We “should” floss our teeth daily.
Let’s get real.
In this post, I’m going to suggest an alternative for the Afford Anything readers who embrace the reality that they’ll never actually make a budget. It’s my anti-budget, and it’s simple:
Pull Your Savings off the Top. Go Wild with the Rest.
Boom! See how easy that is? There’s no need to classify whether your money is going towards groceries, electricity or cat food. Just skim off the amount of money that you want to save. Run wild with everything else.
You could call it the 80/20 Budget –- spend 80 percent, save 20 percent. This is the smallest savings rate I’d recommend. If you want a thicker cash cushion, try the 70/30 Budget –- spend 70 percent, save 30.
No matter what ratio you choose, the anti-budget is a simple two-step process:
1) Pull your savings off the top
2) Run wild with the rest
You don’t need to line-item your sunglasses, moisturizing cream, and that time you ran to the grocery store to pick up some broccoli. Let’s face it, you were never going to line-item those purchases, anyway. And you read financial blogs! If you’re not going to do it, who will?
No one. And that’s the point.
Every time I write about this concept, I hear the same few questions:
Q: Where should I put my savings?
A: Here’s your step-by-step itinerary:
- Get your full employer match on retirement contributions (if you get this workplace benefit).
- Save a small emergency fund (equal to two weeks pay).
- Pay off high-interest debt (anything with an interest rate of 8 percent or more).
- Grow your emergency fund to represent 4-6 months of expenses. Keep this in a high-interest savings account like Everbank, which is always in the Top 5 percent of yields nationwide.
- Contribute 15 percent into retirement funds, like your 401k, IRA or HSA.
- Save at least 5 percent of your income for specific long-term goals like making a downpayment on a house, throwing a wedding, or traveling through South America for three months.
- Pay off low-interest debt (like your mortgage or a low-interest student loan).
At this point, you’re saving 20 percent of your income, which is divided into 15 percent for retirement and 5 percent for long-term goals.
If you want to be a rockstar, boost your savings up to 25, 30, or even 50 percent of your income. First put it towards debt payoff, and when you’re done, focus on using that money to create investments like owning stocks, rental properties and buying or creating businesses.
Q: “How much should I save?”
A: If you’re carrying high-interest debt (8 percent APR or more), save 40 to 50 percent of your income immediately. Credit card debt is an emergency, and it demands drastic action.
If you’re high-interest-debt-free (HIDF), save at least 20 percent of your income. If you’re serious about ditching the rat race within the next decade, shoot for the 50/50 budget (spend 50 percent, save the other 50 percent).
Q: “I can’t save! I don’t earn enough to save anything!”
A: You’re telling me that you earn $3,021 per month and your expenses come to exactly $3,021 per month? Somehow, I find that doubtful.
Everyone is capable of saving, but some people haven’t adopted the habit yet. If you’re new to saving, take baby steps: Next month, save an extra one percent. If you save nothing at the moment, start by saving one percent next month.
To calculate one percent, knock two zeros from the end of your monthly after-tax pay:
- If you bring home $2,000/mo, save $20
- If you bring home $4,000/mo, save $40
- If you bring home $25,000/mo, save $250
The following month, save one percent more. And the next month, save one percent more again.
After a year, you’ll be saving an extra 12 percent of your income.
Need a community? Check out the One Percent Challenge, a group of Afford Anything Rebels who are boosting their savings rate, one percent at a time.
Thanks to Flickr user Hugo Quintero for today’s photo.