After creating a vision for your life and money (see my example) you should have a clearer idea of what your money needs to do for you. For instance, if your life is headed towards buying your first house and starting a family, attention to your debt and credit, as well as saving something for a down payment is paramount. But if you’re heading towards a promotion and some long-time stability in your job with good credit, perhaps you’re looking more at ways to give back, allocate certain amounts of money to particular goals like travel or home renovations, and you’re ok with paying off your low interest debts over time without prepayments. Like I’ve said before, money should be a tool to live your best life, and as such the ‘right’ decisions with your money can be as varied as people’s income situations and life plans.
Whatever your vision looks like, you will need to identify three key numbers to put your money on track with achieving your most important life goals. First, the amount sent to savings each month. Second, the amount put against debt each month. Third, the amount for discretionary spending each month. The combination of setting up your checking account tracker (income in, bills out) and creating a vision for your life will help you decide what these amounts should be based on your values and priorities. If your expected monthly income is $6,000 and your total cost for your set bills (rent, utilities, insurance, loan payments, etc.) in your checking account bill pay spreadsheet is $3,500, you have $2,500 to distribute across these three categories: savings, debt, and discretionary spending. Let’s take a look at each.
What's In This Post
First, how much should you save each month?
Let’s say your goals include buying your first house within the next two years. I’ll talk about more specifics about home buying another time, but for this example, let’s just say based on your research, you’ve decided that you’re anticipating purchasing a $200,000 home, which gives you an expected down payment of $6,000 (3%, minimum for FHA loan) to $40,000 (20% to avoid mortgage insurance and get best rates). Saving $6,000 over 18 months requires saving $333 per month, and saving 40K involves socking away $2,222 per month. OK, let’s put that on hold a minute and consider the other pieces of the pie.
Second, how much should you pay against debt each month?
If your goals include credit repair, paying debt is a leading priority for you, particularly credit-damaging debt that is in default or close to it. We must pay our obligations and it is possible to do so. For purposes of our example, you’ll have to decide a monthly amount that can serve this purpose out of that $2,500 per month you have to allocate. If you’re aiming to buy a house like our example, paying your old obligations and repairing your credit should come before substantial house down payment savings. You may not be able to accomplish everything at once, and that’s ok! Without credit issues, but a longer than you’d like list of loan payments or costly higher interest loans eating up your cash every month, use my debts worksheet planning to identify the priority balances you’d like paid off and the timeline goal for doing so. Let’s say you have a $5,000 balance from a car loan, and a $10,000 balance on a personal or student loan you want eliminated within 12 months. Depending on the interest rates on those loans, you’ll need to use at least $1,250 (0% interest) per month, to conquer that amount of debt that quickly. Put a pin in that and let’s look at the last category before coming back to these numbers.
Finally, how much should you be spending each month?
For purposes of figuring out your monthly spending strategy, I mean all spending that isn’t the regular, same amount each month, standard bills coming straight out of your checking account (for rent, utilities, insurance, loan payments, etc.). Those are items to be evaluated and tweaked at a separate time. The focus right now is all “discretionary,” not pre-obligated, just day-to-day spending… all the goods and services we consume, collect, or use. This would include gas and groceries, but also other dining like takeout, bars, and restaurants, all the stuff and widgets we buy (new toaster, clothing, home decor, flowers for Mother’s Day…), entertainment and hobbies (concerts, movies, hobby supplies, athletic equipment, etc.), the services we pay for (haircuts, lawn care, sporadic babysitting [ie, not your work-hours childcare], house cleaning…), and pretty much everything else that goes on your credit or debit card and eats up your cash. I’d even include memberships and subscriptions (gym membership, magazines, etc) here since they tend to be billing on a credit card mixed in with your usual spending and, therefore, are functionally part of your monthly discretionary spending.
Figuring out the right spending cap for you might take some trial and error, a bit of soul searching, and, over time, a lot of visiting the blog here to learn to shift your mentality on spending and more frugal living and learn some useful tricks. You want to strike a balance between meaningful limits to enable your bigger priorities in life, but also be realistic about the lifestyle you live and your flexibility around that, as well as that of your other family members. Also, accurately estimating necessary spending requires you really think about all the particulars, without ignoring the fact that you will need new shoes sometimes, you will get scurvy if you try to survive only on rice and ramen, and your other family members may not be on board with a new commitment to extremely minimal needs. Trust me, I love getting excited about needing nothing and spending nothing, but I try not to inflict that on my spouse (too much) and I do buy plenty of stuff and services that aren’t just essential to staying alive.
You may be able to do more extreme tightening down in short-term phases, so that’s an option as well that may be more sustainable in short bursts. Just be thoughtful about it. Like choosing when you bring home a new baby to be your minimalist spending quarter- big mistake. But maybe when you find yourself in a season of life feeling relatively stable and not a lot of demands on your time and energy, it’s a great time to buckle down on minimal spending. Point being, be realistic and find a balance that works for your season of life, and ultimately the long haul. It’s much easier on the motivation to tighten things further as you get motivated by the progress in your debt payoff or savings build up, whereas continually struggling or, worse yet, failing each month to keep under your cap will degrade your will to keep on going.
Bring together saving, debt, and spending plan
Getting back to our example of having $2,500 to allocate across these three categories (savings for goals, debt payoff, and discretionary spending), let’s say after some lifestyle review and soul searching you decide you can absolutely get by and live your life well (and financially well under control!) with a monthly discretionary spending cap of $1,500.
That’s $1,500 for everything from toothpaste to weekend fun tickets, gas, groceries, and everything in between. Now, in my anti-budget money management system, you’re not going to divvy this up into budget categories. Instead, you’re going to identify your average burn rate– so $1,500 / 30.5 days averages out to roughly $50 per day spent, or $350 per week. This is the spending number you will watch like a hawk, ensuring you “burn” your money at a sustainable rate.
Is $350 per week realistic? Say your family spends $150 a week on groceries, $50 on gas… will the remaining $150 a week (~$600 per month) cover all the other stuff you tend to do and things that pop up? There will be many topics coming up in the blog about how to live well on less spending, but you do need to start somewhere so come up with your best realistic number.
If $350 week cannot be accomplished, tweak. And remember, underpromise, overperform… especially the first time you’re doing this process. Once you have a realistic number… let’s make it $1,700 per month spending to illustrate shifting the cap to be more realistic for long term success with the plan… let’s get back to our other two categories. You now have $800 to deploy towards building your best life in the savings and debt payment categories…
Before slating out that $800, we need to talk about your other savings buckets, however. Ultimately, you should have a minimum of 3-6 months living expenses in your savings, so $15,000 to $30,000 for our example where $5,000 per month is needed for all the basics. Since most people don’t have this savings, I’m going to assume you don’t yet either. So that emergency money issue is going to be in conflict with jumping straight to the goals you’ve set. This is a toughy.
On one hand, you’ve survived this long without savings so temporarily working towards your next financial goals straight away knowing you still need to work on emergency savings is one approach. It is a much riskier approach, however. This may only be appropriate if you do not have dependents, have a strong safety net (i.e. you’re living with family who could give you a break on rent and help you eat!), and have a very stable job as well as diverse, quickly marketable skills to recover from a layoff, for example. But there are always unforeseen circumstances and most people don’t have such a strong safety net.
On the other hand, building 15 to 30K in savings first will take you at least 18 months, markedly delaying the goals you just developed for yourself, which I know feels like a bummer. The best financial move is to delay any new goals and get that emergency fund in place at all costs. However, I get it. You might not have 18 months before something’s gotta give (e.g. parents are finally kicking you out, baby’s on the way, etc.). Or collection calls are coming, you’re already 6 months behind on a medical debt or credit card debt, and you need to make changes now. I would call these emergency financial situations.
You have to do the best you can with what you have. Period. You’ll need to think honestly about these risks of continuing without enough savings, but if you have no savings, or less than $1,000, I recommend using half of your ‘change making’ dollars, so half of the $800 in our example, to send to your savings account in the emergency fund bucket. And remember, the emergency fund bucket is not your house down payment bucket (or whatever your goals may be); it must be protected money for unexpected expenses that would otherwise completely derail your money plan when those expenses pop up.
So, getting back to the first pass on those new debt and savings goals… we saw above in our example having a down payment for a home purchase in 18 months will require an additional $325 to $2,000+ put into savings every month. On the debt front, you optimally would have had more than $1,250 to put toward your debt payoff goal of picking off those two loan balances within a year, but that will clearly not fit into the $400 you are allocating between these two goals. Do not despair!
You should pat yourself on the back right now just for getting real with your money. That is a great, honest place to be. And if you were spending that whole $2,500 per month previously, you’re in a much more intentional position with your money now! $800 per month- almost $10,000 per year- more intentional. Remember these things do take time, but it is worth it. Creating a realistic plan for the long haul is so important.
And also keep in mind there are other strategies to find more money to put towards your goals that I will cover on the blog! For now, it’s excellent that you’ve identified your spending cap number, learned you will sock $400 into your emergency savings each month (think of how you’ll feel with $2,400 in the bank in six short months?!)… AND now you have $400 each month to put towards either debt or goal-oriented savings, depending on your personal priorities.
Ultimately by combining the work you did setting up your monthly bill paying and tracking in my spreadsheet system, along with laying out your debts, and learning about what you need to save for, you have a much clearer plan ahead. Now that you’ve set the plan, revisit it regularly, and simply execute it one. month. at. a. time. You will hopefully continue to be motivated by the satisfaction you feel having made choices towards sound financial management and have taken the first steps towards building your best life. Trust the process; you will get there!
Want some help making it all happen? I can be your money coach. No commitments, no judgement!! Just honest help.