Interested in starting a dialogue about personal finances and how best to educate ourselves to achieve financial independence.

Your Budget Needs a Fresh Perspective

Your Budget Needs a Fresh Perspective

One thing that makes budgeting difficult is that everyone’s needs are different. There are so many factors such as marital status, number of children, income, location; you name it.

But what happens if we strip it all away? For a moment, remembering our youth, before things became so complicated? Is there anything to be learned by retracing our steps? Can we identify where it went wrong for us?

A budget with a fresh perspective

Our subject: David

He’s freshly graduated from college with a business degree and $30,000 in student loans. He’s single living in a medium-sized city with an entry-level position earning an annual salary of $50,000.

I’m sure you’re already thinking of a long list of adult situations to plague our subject. But instead of throwing the world at him, all at once, let’s step through this picture slowly:

Salary: $50,000
Filing status: Single
W4 allowances: 0
State: North Carolina

His monthly take-home pay (after taxes): $3,154

For starters, David will certainly need basic healthcare coverage.

We’ll be conservative and say that he’s employed by a competitive company offering healthcare, dental, and vision coverage for $115 a month. We’ll also assume that basic life and long-term disability are covered at no cost to David.

His remaining monthly balance: $3,039

David is smart and knows his employer will match 3% on contributions made to his 401k. For reasons, he decides to contribute the full 3% with pre-tax dollars, or $125 a month. Including his employer’s match, he’s now contributing $250 to his retirement each month. Bravo, David.

His remaining monthly balance: $2,914

He does his research and with a co-signer scores an apartment at a reasonable rate. It’s a 530 sq ft studio apartment with just enough room. He collects some hand-me-down furniture, sets up his lava lamp from the old dorm, and settles in.

Some basic costs that come with the new digs:

  • Rent: $1,000

  • Renter’s insurance: $8

  • Power: $80

  • Water: $50

  • Trash: $25

  • Internet: $60

  • Phone: $60

His remaining monthly balance: $1,631

Now, David knows to keep his job, he’ll need reliable transportation. Even still, he isn’t tempted to go beyond his means. He finds a used car, a few years old, for $16,000 at 3.11% interest for 36 months with $0 down.

For coverage, he’s got comprehensive for $175 a month, thanks to an accident-free history.

His remaining monthly balance: $990

Accounting for a margin of error, let’s round to $250 a week. This is what David has each week for food, gas, and fun.

If he drives 32 miles to work round-trip and runs only light errands on the weekend, assuming gas hovers around $2.60, he can expect to pay around $20 a week for gas.

If he eats on a budget, avoids restaurants at all costs, he can expect another $105 a week at an average of $5 per meal.

His remaining monthly balance: $500

$500 a month. It sounds all too familiar and it sucks!

Why bother to save at all?

$500 a month is $6,000 a year.

If David is 22, he’s got 43 years before retirement at 65. If he invests that money in an index fund that averages 8%, he’ll have $2,135,698. That doesn’t even include his 401k, which is another $1,076,392 at the same rate.

That’s three million dollars, at an annual savings rate of 18%.

Annual savings rate = $9,000 savings / $50,000 salary

Is it a realistic budget?

No. Of course, not.

The reality is, he’ll want to have some fun now and again, and issues will crop up: medical bills, car repairs, etc. And, let’s not forget about those student loans.

We all know there will be bumps in the road and hard decisions to make, such is life. But, there’s an offsetting factor too. If he properly invests in himself along the way, his income will grow over time.

He’ll get certified in new technology or learn some soft-skills that will earn him a promotion. It tough for him now, but because he started young and he’ll work hard, he’ll get to enjoy any additional income he earns throughout his career.

Making sure not to drop below his 18% savings rate, he’ll be able to buy a new car, afford a bigger apartment, or start a family. Whatever he so chooses.

Teach your kids about finances

In a world that’s troubled with personal finance sob stories, this story is designed to give hope. David starts with debt, earns an average salary, and still manages to retire with a boatload of cash.

The key is to start early and have a plan. So, teach your kids about David.

Start as soon as you can

The rest of us are perhaps a little older and have already made some financial mistakes. That’s okay.

Pretend you get to start over completely. Thinking fresh can be a useful exercise. Set a goal, then figure out what savings rate you need to achieve to reach that goal.

If you know your savings rate should be 25%, you can start asking some hard questions. Should I own this car or a cheaper one? Is my rent or mortgage right-sized?

You get the idea.

Financial Independence in Less Than a Thousand Words

Financial Independence in Less Than a Thousand Words

Trifecta for Budgeting, Saving, and Spending

Trifecta for Budgeting, Saving, and Spending