Ryan and Leslie discuss basic finances, including household budgets, savings, and debt.
Audio Only Version
Episode Minicast - Writing a Budget
Show Notes & Helpful Links
Set the table: Household Budgeting. So happy we picked an easy one first…
Leslie: Not really, so many moving parts that people don’t think about—until of course those moving parts are grinding.
Ryan: For me everything starts there. You have to be able to understand how to save and how to spend.
Segment 1: Creating a Household Budget
Ryan: How does one put together their household budget?
Leslie: Templates and then work from the knows to the unknowns.
Start with the fixed costs, that is, the things that you know you have to pay and that, generally, have a fixed sum. So: mortgage or rent. Car payment. Utility bills. Insurance. Homeowners Assn Fees. Student debt payments.
Next go to the variable necessary costs: grocery, gas. If you are completely new to being on your own, it will take a few months for you to get an average of what you do—or should—spend. Ask elders or friends with some experience in your town what their averages are and use those until you have enough of your own data to adjust.
Then add in the optionals: eating out, entertainment, clothing. Keep in mind stuff like how you might need a higher clothing amount when starting a job because you need to build up a work wardrobe.
Now consider your pay—your take-home pay, or your “net” after taxes are withheld. For most starting jobs (in the US) taxes withheld are usually sufficient to pay your April tax bill. The IRS is a bit aggressive about withholding, so if you over pay throughout the year, you may even get a refund in April. Still, don’t plan on it. Budget with your net amount.
When you subtract your expenses from your net pay, you want a number higher than zero because even in the beginning, you need savings.
Ryan: Leslie, How much should I be Saving? Spending?
Leslie: There’s the 50/30/20 rule. Generally, 50 to food and shelter: housing, utility, car, cellphone, insurance, and grocery; 30 to discretionary, entertainment, travel, clothes; and 20 to savings. That is supposed to get you a year's salary plus a few months of expenses in savings by the time you are 30. But it typically leaves out student loans. To follow 50/30/20, then student loans need to be in the 50% essentials section, or at least split between the 50 and the 20 of savings. Paying off debt is a form of savings, but some student loans have long payback curves that give the illusion of saving. I also don’t like the basic 50/30/20 because it leaves out charity. Long American tradition of generosity that we don’t want to lose.
Ryan: Start with the problem: what is an appropriate student debt payment amount?
Leslie: Depends. When applying for loans, research first. Find the average net pay for the average position landed for your degree. Estimate cost of living expenses for the typical locale of that job. Then, look up the payback provisions for the loan you are applying for. Estimate your payment amount for the 15 year term or shorter. (Some student loans have longer terms, but you don’t want to be paying for your student loans until you are 42.) Take the estimated net salary — remember to do net. If a starting accountant gets 50K a year they don’t take home 50K — and split it. 30% for housing, utilities, insurance, and groceries, and 20% for student debt. That makes the 50% of the 50/30/20 rule. I wouldn’t recommend a debt load more than that. If you are close, you could pull a bit from the 30 for discretionary and attribute some of the payment to the 20% for savings. Or if your profession is one of those with a steep salary incline, you could do a graduated payback if your loan offers that. (Smaller payments at the beginning. Increases every few years.) But that math should give you a idea of the highest debt load you could tolerate.
Ryan: Now, what about tithing, charity?
Leslie: Not just church, and consider the tithe can be in-kind, certainly while student loans get paid.
Ryan: Are there tools available that can help me with tracking all of this?
Leslie: Templates help. Apple Pages has a simple budget and personal budget template. I assume Excel does too. For basic budgeting, especially planning when you first start out, or when you are trying to figure out what student loan load you can carry, these basic spreadsheets are fine. But if you want to purchase one of the home budget apps and learn the ins and outs while your budget is still simple—I’m all for that. But do be wary. Might save you my mistake. Story… May be one of those times that the old way is best.
Ryan: What is the end result? And different people may have different goals?
End result is the ability to support yourself and family (if in the plan, listen to next episode) through your working years and retirement—yours and your parents, by the way.
Segment 2: Basic Financial Concepts
Ryan: People always say this to me “Ryan, you have to get your money to work for you.”
Leslie: Get compound interest on your side.
Khan Academy has a great intro video.
Better not to get in debt—certainly not credit card debt. Ryan's story.
Ryan: I think its important that you realize that you’re playing the long game here. Instant gratification v.s. delayed gratification. Why do you think people have such a hard time playing the long game and are they some mental things that they could so to stay on track?
Leslie: In large part because they don’t plan. When single, a new salary can seem like so much money or if not much upward potential, it can seem like there will never be enough. In both cases, planning seems like a waste of time. Then, there is no long term, just the now. That leads to very different financial decisions or procrastination.
Ryan: So what are the other “must knows” if you’re just starting out?
About penny pinching, little savings. Some talk that it isn’t worth it that we can’t save to prosperity. Not totally wrong, certainly not for those in a poverty cycle. Skipping daily Starbucks is nonsense advice. But for the margins, little bits of saving add up.
Credit card debt is for emergencies.
Pay off debt from highest interest to lowest.
Avoid being house poor, or car poor, or engagement ring poor—I know the little formulas about what you can afford or should spend—don’t hit those limits.
Segment 3: (Topic) Frequently Asked Questions about Household Budget
Saving for things v.s. paying down debt - Paying down debt is saving for things.
What tools do I need to ensure I stay on track? -
Monthly habit of tracking your spending.
Files of contracts and rules for your various financial obligations: credit agreements, rent or mortgage contracts, utility contracts
Preferred budget and payment method—check, auto pay by credit, auto draft from bank.
Chances are you will need more than one, so you need to keep track of that.
What are the most common points where people fail so we can avoid them?
Not budgeting before buying or renting, specifically apartments or cars
Not talking about living expense expectations with roommates
Living on two incomes, but saving on one.
Forgetting to budget with taxes in mind.
Using credit cards instead of debit cards.
In February, Ryan and I recorded a Twitter Thursday episode on How to Pay Your Taxes. (Twitter Thursday episodes are short podcasts answering Twitter questions.)
For those in the gig economy, you have to pay estimated taxes 4 times a year. Everyone pays year round actually, but employers deduct taxes from each employee's paycheck. That's withholding, and they often withhold more than eventually owed, which is how some people get a tax refund.
Filing taxes for the first time, a story and list
Reality check: we should plan to help parents as they age
A few basic points about expenses in parenting