I was watching the Nate Berkus show yesterday and he has a segment called Paycheck to Paycheck makeovers. From what I could tell, he invites guests who are currently having financial difficulties and makes over a room in their house for them. Must be nice! He did have a finance expert to help the couple, Farnoosh Torabi, and she gave them some good suggestions like save whatever amount you can each month, and start using cash instead of credit cards to meet your monthly budget. However, when Nate asked the couple if they ever talked about finances, they both said "No." Then, he asked them if they knew what each person's take home pay was. Again, the answer was "No." How the heck can you be married to someone and not know how much their paycheck is?!
Well, I think it's a fairly common phenomenon because people don't like to talk about money. The word budget seems to be a "bad" word. It really isn't that hard to live within your means if you can be disciplined. I really can't tell you how good it feels to know that your bills will get paid and you don't have to worry about whether a check will bounce.
If you are engaged, married, or in a serious relationship leading to engagement, you have to have a finances discussion, no matter how painful. This is your family's future on the line! And spouses/partners have every right to know how much the other one is contributing to their household income. Not only do you need to have the initial conversation, but then every month you should be discussing your monthly budget and expenses and checking up on the progress of your savings, investments and retirement. Justin and I will both agree that these are not usually fun conversations and we don't sit here smiling happily at one another in financial and marital bliss. It can get ugly. But at the end of the day, both of us like living within our means, so it's worth it to have those tough talks.
If you are single, then you can just have these conversations with yourself! Seriously, the more you ignore it, the worse it will get. I learned that the hard way before I got all spirit fingers on budgeting.
The simplest way to start your budgeting process is to
1. Figure out your monthly income (actual paycheck amounts).
2. Figure out your monthly expenses that don't vary (for us this includes: mortgage/rent, cable/internet/phone, car insurance, and savings. Some of our categories in the past - car payments, student loans, storage unit). Basically it's anything you can count on being the same exact amount every month.
3. What do you have left when you subtract the total of number 2 from the total of number 1? That becomes your variable expenses. We have categories such as: groceries, gas, electric bill, water bill, household/Target, pet, entertainment. You need to start with the stuff you need and then make your budget for fun stuff like "entertainment," which we consider to be eating out at restaurants, going to the movies, concerts, etc.
And to clarify, savings under #2 is after tax savings such as our Roth and general savings. We also set aside small amounts each month to Christmas and vacation ING accounts and let those build up over the year. Our savings for all of those categories together is about 20% of our take home pay. We would like to be more, but we are working on one income these days. Justin, however, also contributes the maximum allowance to his 401k for the year so we are saving a lot towards retirement that way. The financial experts recommend that you put the maximum allowance for your 401k (pre-tax) and your maximum allowance for your Roth (post-tax) if you do not have a pension. We can't swing that right now, but we are making monthly contributions to our Roth and when I do return to the workforce, the majority of my salary will go to our retirement and our children's college funds. After all, we'll be used to living on one income by then! A lot of companies will match a percentage of your 401k (again, free money!) so why wouldn't you contribute the most you can?
One other thing we do? We budget $100 less than our actual monthly income. That way, you can build up a nice buffer in your checking account ($1200 a year!) or if you have a rough budgeting month, it's not the end of the world. We also make sure we budget the maximum amount we think we will spend for each variable category so that it becomes a little bonus if we come under in that category. Your utility bills are pretty easy to do this with if you access your past year's statements on-line. Find the highest bill and budget $20-30 over that amount.
It's also pretty easy to find out what your variable expense amounts should be if you use a credit or debit card to pay for everything. You just look at your last 3-6 months of statements and find the average of what you spend in each category, like the grocery store. Then budget over that average. Building in buffers is the easiest way for you to stick to a budget and feel good about it. If you budget too low, then you are just going to stress when you don't meet that number. And you won't get it exactly right the first time. We have adjusted our categories many times over the past years.
I'll end this post with my personal advice on how to transition from two incomes to one if you decide to go that route. We were fortunate that it was a gradual transition. I went back to school in 2008 and left my full time job to substitute teach while I worked on my master's in education. We made the decision to move back in with my parents for two years while I was in school. We were fortunate enough to have this option so I know that for a lot of you, this would be not be feasible or enjoyable. (We did pay my parents some money to live there, but nowhere near the cost of an apartment in Northern Virginia). My substitute teaching salary went straight to my student loans, and I was able to get some scholarships over the two years, so when I got my degree in 2010, it was completely paid off. It helped that Mason has incredible tuition rates!
We also used that opportunity living at home, saving boatloads of money, to pay off both of our cars. Then, Justin decided to go back to school in 2009 for his Masters. At Johns Hopkins. A private university. We continued to live frugally at my parents house the first year he was in school, but the second year, I had secured a full-time teaching job and we moved to our apartment in Alexandria. My salary went to two things in our budget - rent and savings. At that point, we had really gotten used to living on Justin's salary for everything else, and we were able to still make significant payments towards his student loans. He paid them off completely last fall!
When we moved to Florida, we transitioned even further into our one income lifestyle, as Justin's income was now going towards our rent. And we chose to move to Florida because of the crazy cost of living decrease. Our rent was over 50% less than in Northern Virginia, and the house prices are about 50% less for a single family home. Again, not an option for everyone to pick up and leave, especially in this economy. My entire income last year went into savings, which we used partially in our down payment, and partially to fund our emergency savings account. (Living on one income, it is crucial to have this in case you lose the one income unexpectedly and need time to recover!)
This is just our experience and it won't work for everyone. However, the basic budgeting principles I laid out should work for everyone, whether you are in a relationship or not. I hope I presented it in a way that isn't too overwhelming! And please realize that Justin and I definitely do not consider ourselves the model for fiscal responsibility - we are just doing the best we can!
Obviously, we had a lot of variables work out in our favor and we decided to make a big sacrifice to live with my parents. (Talk about humbling). Plus, my salary has never been comparable to Justin's. (I'm a teacher. No shocker there). But I will say that if you are planning on going down to one income because one of you is staying home with kids, start living on your one income as soon as you find out you are pregnant. That gives you nine months to adjust to it, and you can put that nine months salary into your different savings allocations.
Well, this turned out to be a much longer post than expected! I just love helping people save money and be financially responsible. There could be worse things to love!
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