I may be frugal, but I am not cheap. I spend my money wisely so that we can live a debt free life. Now don’t get me wrong, we have a long road ahead of us to becoming debt free and affording everything we want…
But we’re getting there with baby steps. As I’ve learned and mastered this whole budgeting thing, I’ve realized that I don’t want to go without. One of my biggest fears is having to live paycheck to paycheck. Most people are afraid of drowning, or dying alone…mine is living beyond my means. I do have other fears (dang clowns!), but I just don’t want to be a burden and live a stressed life because of my money choices.
J and I have an agreement – we can have anything we want, but we just have to save for it. He wants new bowling equipment – that’s fine, save for it. I want a new design for this blog – then I have to save for it. It’s simple.
We’ve started living by the 70-10-10-10 rule… It has a long name, but it’s a game changer!
Image by © Royalty-Free/Corbis
Here’s how it works:
70% of our income goes to our expenses.
Expenses like cell phone bill, utilities, groceries, gas, insurance, etc. This is where those irregular payments go into. I shared about our sinking fund before. We count those as monthly expenses since they are expenses in the future.
Here’s an example:
You and your spouse take home $4,000 a month. This amount is what you deposit into your checking account.
70% of $4,000 is $2,800.
All of your monthly expenses should be $2,800 or less. Groceries, car payments, car insurance, life insurance, entertainment, gas, utilities, credit card payments, loan payments, etc. Even the expenses that aren’t on a monthly basis, such as personal property taxes, home insurance, etc. are all treated like a monthly bill. You can read more about it in my sinking fund post on how we do that, but we treat any current or future expense as a monthly bill. In the end all of your monthly expenses should all be around $2,800 or less. Not more.
10% goes towards savings.
We put about 10% of our income into our savings accounts each month. We have an emergency fund that we put money in. We like to keep at least $1,000 in there as our zero balance. I put a little more in the account every month just in case we need to fix the car, replace the hot water heater or have an unexpected medical bill. Especially with the baby on the way, we like the thought of having an extra cash cushion in our savings.
Again, using $4,000 as our take-home amount. You should be putting an extra $400 a month into your emergency fund to build it up or into an extra savings account.
NOTE: Be careful on your savings account. If you have more than 3-6 months worth of living expenses then you need to start using your money to pay off bills or for another purpose. You want your money to work for you. It’s not doing any good sitting in a savings account collecting a small amount of interest. Put it to work.
10% goes towards paying down debt faster.
We’re able to afford about 10% of our monthly income and put it straight to debt. Some months are easier than others, but on average we’re paying more and more. We’re doing the debt snowball method to get ourselves out of debt and it’s working.
Let’s use our $4,000 take home as an example again.
10% of $4,000 is $400 a month. You should be allocating an extra $400 a month towards your debt snowball. If you can afford more or already have your emergency fund built then you should definitely put additional funds to get out of debt faster.
10% goes towards retirement and tithing.
Some will say that you should work on getting out of debt first then start on your retirement. However, I don’t like that theory. I love compound interest. So by putting money into our retirement plans and roth IRAs now, we will have more than if we put in a larger amount later down the road. Eventually our goal is to max out on our annual contributions to both of our 401(k)s and IRAs, but we’re a long way from that.
Being in our late 20s, almost 30s I thought it was important to get started on our retirement savings. We have it automatically come out of our joint checking account in the middle of the month so we don’t even have to think about it.
If you have any money leftover or would like to split the last remaining to donate to charity or your church, then that’s what you should do. This last 10% can be shifted to fit your needs and wants. You go with what’s most important to you. Just make sure you’re covering your monthly expenses and working on getting out of debt. Those are the big kickers for any budget.
If you’re living above your means then it will be a revolving door of stress and worries. Trust me. The first step in implementing the 70-10-10-10 Rule is to work it out on paper. Take out your handy budget and start playing with the numbers. See where you’re overspending and where you need to pick up some slack. The first thing to go for many families is savings. So make sure you’re working on building your emergency fund and then start finding extra money to pay towards debts.
NOTE: Please don’t think these percentages will work for everyone. They won’t. No matter how hard you try. They are a guideline. Some months we go over and others we’re right on the dollar. Find a combination that works for you. Just make sure you’re hitting all of the areas that you can afford. I started with the most important categories – expenses and savings. Then I worked in paying down debt and retirement/tithing. So that’s how you need to create your budget.
Let me know how this spending rule works for you!