Kicking Financial Ass

by Paul Christopher Dumont

  If this is not possible, then adapt. Let’s say you are unable to work and are dependent on a set income while supporting a family or are a single parent. It is best to shoot for the moon. If you miss, you will still be among the stars. Meaning, if you find saving 40% of your income is impossible, aim for 30% or even 20%. Common advice is to save 10%. So, if you are saving more than that, you are doing better than most. That said, I still believe hitting the 60/40 ratio is doable for most and should be the goal for all, especially if you follow the advice in this book. Now, let’s break down the various buckets.

  Emergency Bucket

  The emergency bucket is easy. It is saving $1,000 in the beginning. Then, after you are debt-free, save two months of income. Building up to $1,000 should be your #1 priority. Use any additional savings you have to create the emergency fund.

  Spending Bucket

  While each expense item is flexible depending on your circumstances, aim to achieve these percentages with your spending bucket:

  •Housing (rent or mortgage payments): Spend 25%

  •Food: 5% to 10%

  •Utilities (power, gas, water, broadband internet, and phones): 5% to 10%

  •Transportation: 5% to 10%

  •Insurance: 5%

  •Miscellaneous: 5%

  For example, say you make $60,000 a year or $5,000 a month. After taxes, assume you take home $4,000 a month. This is what it could look like:

  •Housing: $1,000 a month

  •Food: $400 a month

  •Utilities: $250 a month

  •Transportation: $250 a month

  •Insurance: $200 a month

  •Miscellaneous: $200 a month

  Total Monthly Expenses= $2,300 or 57.5% of $4,000

  Savings= $1,700 or 42.5%

  In the miscellaneous category, I included entertainment expenses, and eating and drinking were categorized as food. Use this only as a guide, however. People with lower incomes will spend a higher percentage of their income on housing and food, for example. But what if you are on a variable income, e.g., you work on your own or freelance? In that case, keep your fixed costs as low as possible. This allows you to keep your automatic payments on schedule.

  But wait a second, where are debt repayments in that budget? Debt repayment should be your #1 priority after creating your $1,000 emergency fund! Every spare dollar you have after creating an emergency fund should go toward paying down your debt. In the above example, if the budgeter had debt and already had an emergency fund, then $1,700 a month should be used to pay that debt down. See Chapter 5: Take Back Control of Your Debt for detailed advice.

  As mentioned, this is just a guide, but your ultimate goal should be to get your monthly expenses below 60% of your income. I have no debt, so I have no debt repayments. If you have debt, I recommend living closer to work to save on driving expenses and having a roommate to save on housing costs.

  The 40/60 budget is what I aspire to and how I live. I have lived on 40% of my income for over three years, saving 60%, and managing to pay down $50,000 of debt, save up down payments for multiple properties, and have a six-figure retirement portfolio. Going to this extreme, I would be able to retire in 10 years. It is up to you to know what you are comfortable with, but I highly recommend overhauling your entire financial situation to the 40/60 split. This strategy is easier once you hit the first 60/40 target.

  Savings Buckets

  Once you have an emergency fund and are debt-free, work toward your retirement. If you want to retire in 22 years, save and invest at least 40% of your income in investments. If you want to continue working until you are 65, then spend more than 60% of your monthly income. However, I assume you want to retire sooner than later. Every dollar you invest in your long-term savings bucket should double within 7 to 10 years if you buy stock market indexes. If you are 25 years old, then your money should double five to six times before you turn 65. Learn more about compound interest and index funds in Chapter 10: Invest in the Index.

  Tailor the exact amount to your retirement goals. Try to save at least 40% of your monthly income by setting up automatic withdrawals into two separate bank accounts. I recommend dividing your savings accounts into short-term and long-term, with automatic withdrawals going from your paycheck checking account into each of the two accounts.

  Short-term savings: Short-term savings is for saving up for a down payment on a house or paying for a car or vacation. Splurges also fit into this account. You have some flexibility, but the most I would put into this account is 20% of your income after taxes, preferably less.

  Long-term savings: Long-term savings is for retirement. Ideally, set aside most your savings for retirement, i.e., more than 20% of your income, because the more you invest now, the sooner you can retire. If you save 20% of your income in long-term investments, expect to retire in 37 years. If you save 30%, 28 years. And if you save 40%, 22 years. If you save 60%, like me, 10 years.

  Often, people forget to invest the money from their long-term savings account. To avoid this, see if your bank or online brokerage can invest the money automatically. If not, then follow these three rules for your long-term savings bucket:

  1.If your checking account balance is greater than $1,000, transfer all the money into your investing account.

  2.If your investing account balance is greater than $1,000, invest all the money into the index of your choice. See Chapter 10: Invest in the Index.

  3.Never break Rule #1 or Rule #2.

  It is too easy to try to time the market if you are not automatically set up to buy the index. So, stop trying to make financial decisions and automate it. The more you can automate this process, the less you will fall victim to the harmful biases investors can have. And to be sensible, automation simply makes your life easier.

  Use Dual Incomes to Your Advantage

  If you have a spouse or partner who brings in an income, then use the dual incomes in your favor. A proven way to retire in less than 10 years is to save one salary and use the 60/40 budget on the other.

  Say your household after-tax income is $100,000, with each spouse making $50,000 a year take home. To achieve the 60/40 budget, save $20,000 from one spouse’s salary (saving 40%) and then 100% of the other spouse’s income. This equals $70,000 out of a $100,000 combined salary or 70%, allowing them to retire in as few as 8.5 years.

  The ultimate goal may be to save 100% of the second salary, but do what you can and work toward that goal. Remember, spend money on what brings happiness to your family and life.

  6 Essential Steps to Incorporating the 60/40 Bucket System

  Incorporating the 60/40 budget, or a variant of it, takes time and discipline. It will not happen overnight and should not be expected. However, if you choose to adopt this method of budgeting, here are six quick steps to follow to make it easier.

  1.Monitor your spending (for at least three months)

  I recommend services such as Mint.com, Personal Capital, or You Need a Budget. Each service has a website interface along with apps for Android and iOS so that you can access your account from nearly every device you own. They also offer the option of connecting to your bank accounts to allow transactions to be automatically imported and categorized.

  2.Confront your spending

  At the end of the month, review the service you chose and see how much you are spending. I usually do this on a weekend, and it takes me less than 20 minutes. The results may surprise you.

  I often ask people to estimate what they think they spend their money on and how much and then ask them to track their expenses to see how close they were compared to their actual spending. Usually, the estimates are way off. It is always a good thing to confront spending sooner rather than later.

  The first month provides a sense of your fixed expenses, such as rent, car payments, and child care, and of your variable costs, such as entertainment. However, one month is not enough to create an accurate picture. You may have a dentist appointment one month, an oil change
another, and tuition due in yet another. To obtain a more accurate average, monitor your expenses for at least three months.

  3.Create financial goals

  You now know your monthly fixed and discretionary expenses and how much saving on the little things adds up over time. So, put together a financial plan with goals that you can realistically achieve over the course of a year. Setting specific financial goals and working consistently to meet them can fill you with a deep sense of accomplishment in your life.

  Financial goals can be categorized as short-term, medium-term, and long-term. Make a goal for each.

  •Short-term goal: What will you do today, tomorrow, next week, and this month to start making an impact on your situation? It could be to pay down your credit card debt or cut down expenses by a certain amount.

  •Medium-term goal: Set a goal that is at least a year away. Do you want to have an emergency fund and have a portion of your debt paid off?

  •Long-term goal: Decide what Big Hairy Audacious Goal (BHAG) you want to accomplish with your finances over the next few years. Perhaps it is being debt-free, having a down payment on a house, or paying for your children’s college tuition.

  4.Reduce your spending over time

  Now that you have your financial goals and are more mindful of your purchases, try to make small changes to reduce your expenses over time. Ask yourself if a purchase is taking away a negative. For example, if you feel tired in the morning and need a coffee, get a coffee. But instead of getting a latte at Starbucks every day, settle for a drip coffee either from home or, better still, get the free coffee at the office. These small cutbacks add up over time and give you confidence in your ability to budget.

  Another method is adopting the cash diet. Essentially, you give yourself a daily budget and pay only cash for most of your expenses. One simple way to adopt this is to use envelopes. On payday, set aside a certain amount of cash in a labeled envelope for each category. When you pay cash for things, keep the receipt and put it in the envelope so that you know how much you spent on what. The underlying principle is to never borrow money from one envelope to beef up another. Leftover money can either be kept in the envelope to allow for more spending the next month or can be moved to a savings goal or for repaying debt. If you use this method, include a buffer envelope because it is likely that your expenses will vary month to month.

  5.Leave buffer room

  You do not want to adopt the 60/40 budget right away. Take small steps and enjoy life. Have some fun, treat your friends, but remember your goal. If you go out one weekend, be disciplined during the week.

  6.Reward yourself

  This might seem counterintuitive to reward yourself in reaching your financial goals, but I believe this is key when developing the habit of paying back debt. Of course, going too far with the reward can be counterproductive. If you hit a financial milestone, such as saving up 5% for a down payment for a house and your goal is a 20% payment, celebrate by going out that night.

  SAVINGS TIPS

  In general, do not spend more than 25% of your gross income per month on housing if you want to hit the 60/40 budgeting target. Many people are shocked that they spend close to 40% when they include costs like utilities. If you spend more than 25% of your income, find a cheaper place to live if you can. To hit the 40/60 goal, aim for housing to be 10% to 15% of your monthly income. If you rent, save the difference between your rent and what a mortgage would cost. I rented my friend’s basement suite for $500 a month for over two years in the suburbs. Before that, I lived with my family for a few years in the suburbs for about the same amount. At the time, the amount was about 6% of my gross income or 11% of my after-tax income. My living expenses are now $900 a month with utilities, cable, and internet included. That might sound extreme. Only you know what you are comfortable with. You can always find a roommate to split the cost of housing or, if you have a spare bedroom, Airbnb it out for extra income. The goal is to reduce the cost of housing to as low as possible since it is the largest expense each month. But remember, live comfortably. I know many do not want to live in a sketchy part of town, and families have different space requirements. Every dollar you save adds up over time and allows you to retire earlier. One hundred dollars a month savings on rent is $1,200 a year and can grow to over $537,00012 over 40 years in a stock index if you keep saving and investing it.

  Savings Tips for Food

  We all have the same number of hours in the day, but most of us are so busy at work that to come home and cook dinner, especially with a family, is a lot. Most of the time, it is easier just to order in and call it a day. With Uber Eats and SkipTheDishes, eating out has never been easier.

  Step 1: Add Up Your Daily Spending on Food

  Think about what it costs when using those services. The average delivery fee for Uber Eats is $4—not to mention the meal, which may cost $15, give or take a few dollars. That is nearly $20 a meal just for dinner. If we eat out for dinner, we likely eat out for lunch as well. So, add another $15 a day for lunch. Now, we are at $35 a day. Add a couple of coffees, and we are quickly at $40 a day. That is $200 a work week or $800 a month for food, and that is just for one person, not even including the weekends. Multiply that by 12 months in a year, and that is $9,600 a year on lunches and dinners during the work week. If your take-home pay is $45,000 after tax, you are spending 21% on eating out. Food costs are a significant reason why it is hard to save.

  Step 2: Batch Cook to Save Time and Money

  What I described above was me right after undergrad. Sure, I was saving money on my commute by taking public transportation, but I was more than making up for that by eating out. After doing that for my first year out of school, I knew there had to be a better way. Then, I read The 4-Hour Workweek and came across the concept of batching to be more productive. I am lazy by nature, so anything that saves me time and money is worth a try.

  You can do batch cooking any day of the week, but for me, I find batch cooking on Sunday results in me doing it more often. Search for online recipes that are easy to create in batches that you can use for lunch and dinner. Favorites of mine can be made in a slow cooker, like chili, stew, and soup. I also like recipes that involve a maximum of 10 ingredients and are baked in the oven. I usually have a carb (rice or noodles), a green (broccoli or spinach), and a protein (chicken or beef) and then multiply that by 10 for the week. Cost per meal is less than $5, the bulk of that cost is from the protein. Another tip is to batch cook at a larger scale and make twenty, thirty, or forty meals and freeze them. This way you can cycle meals to avoid repetition, and you have a buffer in case you do not have time on the weekend to batch cook for the week. This is a lifesaver if you have a family.

  Step 3: Shop at Costco or Sam’s Club to Save Money

  If you have a family, buy your groceries at Costco or Sam’s Club. Even with the fees, you can save over $1,000 a year by shopping there. Otherwise, keep an eye out for sales and swap ingredients for the cheaper version if you can. I do not let sales dictate what I buy, however. If I need milk and it is not on sale, I still buy the milk. Time is money, and I do not have time to drive to multiple stores searching for the best deals.

  Step 4: Research Affordable Recipes

  Another good resource you can use is budgetbytes.com for delicious recipes designed for small budgets. They break down the cost per meal and serving so that you can easily budget your meals. The best part is you also know the prep and cook times so that you can plan your cooking time.

  Other Ways to Save Money

  I summed up a few quick ways you can save money now to achieve the 60/40 budget:

  1.There is no need to try to impress people. The only validation you need is from your family and yourself. Remember internal versus external motivations.

  2.Try not to go shopping for shopping’s sake. If you need something, buy it. But do not wander aimlessly in a shopping mall looking to buy something.

  3.Wait until you need something before buying it.
Do not buy things “just in case.”

  4.Cancel any clubs or memberships that do not directly contribute to your happiness and welfare.

  5.Search online promo codes for things you need or in-store coupons.

  6.Sell any possessions that you have not used in the past year. You want to be frugal, which is having a high value to stuff ratio. If you are not using something, it is not providing value. I recommend using eBay for selling to a global audience for more niche items or Craigslist and Kijiji for local classifieds for more popular items.

  7.Buy used. Use eBay or classified like Kijiji to find like new things for a fraction of the price.

  8.Avoid designer clothes, if you can. You can usually find stylish clothing for less. If you must, only buy them if you are going to keep them for at least five years.

  9.Take care of your possessions. Use them until they stop working or until the inconvenience to you is greater than the cost of replacing it. Then, toss them. Do not spend the money to move items that you are not going to use.

  10.Find a roommate, if you can. This technique is one of the easiest and best ways to save money.

  11.Do your research on value, quality, and durability. The cheapest item is not necessarily the best value if it is low-quality.

  12.Avoid playing the lottery. It is a tax on the poor. Studies show that the neighborhoods that spend a lot on the lottery are the lowest income areas of town. Of course, buying the occasional ticket, if it is within your budget, does not hurt.

  13.Avoid gambling if you can. The reason casinos exist is because the odds are in their favor. If you do gamble, give yourself a limited budget and stick to it.