Bitchin' Budgets

Welcome.

We have talked quite a bit already about the overall plan for your money, as well as how to get out of debt, and of course, how to invest.  

Now it is time to talk about how to run your money in your own home.

It seems like every subject matter expert out there in the field of personal finance recommends that everyone creates, follows, and constantly updates their budget.

Budgets are great, yes, but
most people either won't create one,
or they won't stick to following it once it is created.

As a result, continuing to recommend budgets isn't too helpful for most people.
  

In my opinion, it borders on annoying or even alienating people from taking control of their finances!

Personally, I think we can advance to greater!  

Budgets are going to become a thing of the past once the word gets out about my 

Spillover Spending Plans.

Here's how it works:

We prioritize our spending.

First, in my book, is God.

  

So I am committed to tithing.  I give 10% of my gross income to my church.  I think tithing based on your gross income is more faithful and proper.

I have witnessed incredible good fortune come into my life and into the lives of others when I and they started tithing.

• If you are not a religious person - that's absolutely fine!  However, I believe that giving is important and it will help you.  Give to a charity that you believe in.

Second, is me and my family.

This means we pay ourselves next.  No one else is going to do this for us - so we must remain committed to doing this.

We pay ourselves into our investment accounts and our savings accounts (more on this later).

Third, we set aside money for deferred expenses like large, irregularly occurring bills, such as Real Estate taxes, Christmas gift spending, the yearly Insurance premium, and a pool membership.  That way, when the bill comes in, we have a pile of money already saved up to cover it - we don't have to figure out how we're going to make it work using the money from the current month's income.  Every so often we realize that we have too much extra money sitting here (in my personal experience) so we sweep the excess to a more-productive account (usually an investment account).

I like to remember these top-tier spending considerations using the mnemonic DISCs.

DISCs are:

• Deferred Expenses
• Investments
• Savings
• Charitable Giving

Once your DISCs are fully-funded, the money that is left over is for your other, day-to-day or month-to-month living expenses.

I like visuals, so here is how this looks for me:

First, you dump 10% of your gross income into your tithing/charity cup.

Then, you add to your Emergency Fund until it is full (minimum of 3 months of expenses).  If this takes all of the rest of your income - then that's as far down the Spending Spillover Plan as you go.  

Now, I understand that you have to pay for rent, food, and utilities - I don't want you to starve or be evicted, but I also don't want you to think that you can spend willy-nilly.  

Until you have a fully funded emergency fund, you must be dedicated to filling it up fast.

Savings into this account and your Targeted Savings accounts should be 10% of your gross income, minimum, forever.  

If you manage to fill your Emergency Fund and all of your Targeted Savings accounts are all fully-funded for their purposes - then you set this forever-incoming 10% aside into another general savings account or investment account that you can draw from if needed.

Then you fund your investment accounts.  Tax-advantaged accounts get filled up first.  I recommend investing 20% of your gross (that's pre-tax, remember) income.

Next, you set aside money each month for your deferred expenses like Real Estate Taxes, yearly Insurance premiums, or even quarterly bills like Water/Sewer.  This will probably come to a bit less than 10% of your gross income, but I like that round number, 10%, so its what I use and recommend.

After that, I like to fund various savings and/or investment accounts which I think of as "Targeted Savings Accounts."  These are where I do, and you should too, save for foreseeable expenses like your next car, the vacation you want to take, building a deck, replacing your home's windows, the next house, etc.

No one else will do this saving for you.  And if you don't have your savings built up, you might sign up for debt to pay for the next thing - which puts you back to square one and starts you back on the path of working to give your money to someone else.  Don't sign up for debt!

Think of it this way, if you get paid every two weeks and you set aside $100 out of each paycheck into your "Next Car fund," in 5 years you will have $13,000 sitting there to help replace a car.  I use an investment account for this to generate higher returns over this medium-term saving period.

You may have noticed that your DISCs take up 50% of your money, 

based on your pre-tax, gross income. 

• 10% Charitable Giving
• 20% Investing
• 10% Saving
• 10% Deferred Expenses

After your money trickles all the way down and into your spending cup - that is where you get to buy things like a place to live, food and entertainment, meals out, dates, household supplies, and cool gadgets.

This is actually less than 50% of your income because your DISCs were all paid out using your gross income number - the money coming in the door is less than that, for most people, because of the taxes taken out before they ever get to see their money.

This Spillover Spending Plan makes things challenging, but it enforces a kind of spending discipline on you without you having to create, and stick to, a budget.

Obviously, as your income increases, the extra spendable money is noticeable and welcome.
You can set this on auto-pilot with most banks and investment brokers where, as soon as you get paid, they automatically transfer the correct amount to your other accounts.
That makes your spending discipline even easier!

Here's an example:

If your employer pays you the national average $48,000 yearly income, here's how this might look for you:

Based on living in Virginia, which is a moderate tax state, your take home pay would be around $36,975.  That's about $1,422 that shows up in your bank account every two weeks.  You can do a rough numbers check for your state here.

• $4,800 goes to your religious organization or a charity that you want to support.  Leaving you with $32,175.

• $9,600 goes to your retirement account(s), leaving you with $22,575.

• You save another $4,800 for the financial challenges you want to avoid and the things you want to have in the future.  That leaves you with  $17,775.

• You set aside $4,800 for your large or irregular deferred expenses too, leaving you with $12,975.

If you get paid every two weeks, like many people do, this level of income and this Spillover Spending Plan gives you $499 left over to spend each two weeks!  That's money for a good place to live, food, and whatever else you want.  And it all comes with the security of knowing that you are saving and investing at the right rates to set yourself up forever!  

You can move forward into living your life from this point, knowing that if you have the money for something, you affirmatively CAN afford it.  It takes away the stress, the anxiety, and indecision.

A well-crafted Spillover Spending Plan can make your financial life so much simpler - and best of all... NO BUDGET!

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If you like this idea, you can use the following to craft a version of this that is best for your particular circumstances:

Even a simple editing program like MSPaint is helpful.

Below, I have included one with Mortgage/Rent as a cup - since a lot of people like to think of it this way - feel free to adjust these to your needs.

Then you can print this out and start penciling in numbers until you figure out what works for you!

The thing is, though, that the above illustration, while useful to many because it is how they think of things, is flawed.  

Your rent or mortgage payment should not be that high up in the spillover spending plan.  

It should come right after/below your targeted savings accounts.

It is only once you have paid yourself, fully, that you can start using the leftovers to live on.

Those earlier/higher payments to yourself (and your Tithe) are what set your life up for perpetual success.  It is what sets your investment accounts up to be fully funded when you need them.  It is what sets up your life to be free from stress and want later in your life.

It is worth it to win with money.  You don't want to have too much financial pressure on you when you're older and you're less-able to convert your ability to work into financial capital.

If you find that the Spillover Spending Plan doesn't leave you with enough money to afford food, shelter, and utilities it is important to consider:

• Are you living in a place that is too expensive?
  Downsize your shelter expenses.
  Move to a less expensive place, try for a place close to your work.
  Your choice of shelter is the single largest determinant of the rest of your level of spending.  Big houses cost a lot to insure, heat, cool, maintain, landscape, and use a lot more electricity.
  There is also psychological pressure to 'keep up with the Jonses' and have nice cars in the driveway of a nice house.  Those cars are expensive.

• Are you making poor food choices?  Eating out is expensive!  

• Are you making poor transportation choices?  Is your mode of transportation too expensive to own, maintain, and run for your current level of income?  Are you commuting too far?
  Get a bike!

• Is it time for a roommate?

• Do you need to upgrade your education, skills, or work ethic to make yourself a more valuable and - eventually - a much better-paid employee?

• Is it time to start your own side business?

• Do you need to take a second job temporarily?