In an effort to build up our savings lately, I’ve been researching a lot about how we can cut back our annual expenses. I’ve found that there's a fine balance between reducing our overall spending and maintaining our current level of family happiness. After all, we could save 100% of our income, but that would leave us with no food, no home and no fun. (Insert sad face emoji here).
On the opposite end of the spectrum, we could save 0% of our income and live a high-flying life of luxury. We’d have everything we want and more. It would be a true abundance. The problem with that situation is those good times are short-lived. We’ll have nothing saved for retirement and we wouldn’t be prepared for an emergency like a job loss.
So what’s the balance between literally and figuratively starving ourselves (100% savings) and not planning for tomorrow (0% savings)?
As perhaps an answer to this happy life balance conundrum, the 50/20/30 rule recommends saving at least 20% of your annual income. This allows us to still pay for 50% of our life’s essentials like food, transportation, home and utilities and 30% goes to personal expenses like clothing, travel and entertainment.
Woo hoo! We’re not living on the street and we’re saving for tomorrow!
Let’s see how this breaks down for this guy, Hunter:
Hunter is a 26-year old software engineer living in the Los Angeles area. He has student loans, car loans and he’s currently living in a rented condo with roommate. Money is tight for Hunter with his debts, but he’s focused on hitting that 20% savings level so he can eventually retire.
Salary: $60,000 (monthly after tax approximately $3,750)
50: Essentials (50% or $1,875)
- Housing = $800
- Bills = $150
- Food = $450
- Transportation = $200
- Debt Payments = $200
- Total = $1,800
20: Savings (20% or $750)
- Retirement Investing = $400
- Emergency Savings = $400
- Total = $800
30: Personal (30% or $1,125)
- Entertainment = $600
- Clothing =$100
- Travel = $200
- Gifts & Donations = $100
- Random Fun Money = $100
- Misc = $50
- Total = $1,150
Hunter is rocking the savings at slightly over 21%. He’s building a healthy retirement portfolio and a solid emergency fund. His “personal” expenses allow him to have some fun on the weekends with his buddies and enjoy his 20's in La La Land.
How Debt Freedom Affects the 50/20/30 Rule
After reviewing Hunter’s situation, I’m a fan of the 50/20/30 rule. It brings balance to your life and helps you to still have fun and save for the future.
But … What about when debt is completely out of the picture?
Our family has been fortunate enough to pay off all of our consumer debt and we plan to be mortgage free by the end of the year. Given this debt free situation, our new budget balancing act is now becoming a major decision point for our family.
With zero debt and no house payment, I’m not sure the 50/20/30 rule makes sense for our family anymore. Even though the US economy is mostly driven by our personal consumption, I’m not interested in consuming for consumption’s sake. If we have a happy, satisfying and fulfilling life now, why spend more if it won’t increase our joy?
That leads me to think that a 30/40/30 budget plan may be our best course of action. With that kind of savings, we could maximize our tax favored retirement accounts like our 401k and Roth IRAs. Additionally, our savings could allow us to invest in buy-and-hold rental real estate or start a taxable brokerage account. Grow that passive income baby!
30/40/30 (Debt Freedom) Rule
We had fun with Hunter, our mid-20’s software guy. Now let’s look at a married couple in their early 40’s with kids and see how the 30/40/30 rule might work for their family.
Meet Dave and Dawn and their two kids, Jacob and Isabella:
Dave and Dawn live in the suburbs of Cleveland. Lately, they’ve really been enjoying their new debt free life. A few years ago, they crushed their student loans, car debts and most recently they paid off their mortgage which freed up an extra $1,000 per month for them.
Dawn has a full-time job in an Accounting Firm and Dave works as a Real Estate Agent. Dave’s flexible schedule allows him to drop the kids off and pick up the kids from school. Dawn really likes her profession, but the long office hours are driving her crazy. Both her and Dave have a dream of creating a real estate holding company so they can leave an incredible legacy for their kids, but they would need to save up for a few years before they could get their first property together.
Let’s see how the 30/40/30 rule might help this plan become a reality.
Combined HHI: $125,000 (monthly after tax approximately $7,700)
30: Essentials (30% or $2,310)
- Housing (Taxes, Insurance & Repairs, NO MORTGAGE!) = $400
- Bills = $450
- Food = $825
- Transportation (Gas, Repairs and Insurance) = $450
- Life Insurance = $75
- Total = $2,200
40: Savings (40% or $3,080)
- Retirement Investing = $1,800
- Kid’s College Savings = $300
- Real Estate Savings = $1,000
- Total = $3,100
30: Personal (30% or $2,310)
- Entertainment = $500
- Kid’s Activities = $250
- Home Improvement = $300
- Clothing = $200
- Travel = $400
- Gifts & Donations = $450
- Random Fun Money = $100
- Misc = $200
- Total = $2,400
Without the mortgage and debt payments, Dave and Dawn are able to bank up their money for future real estate investments. And since Dave is a real estate agent, he’s already got his eye on market to find the best deal in Cleveland. I hear buy-and-hold rental real estate is hot there right now!
Hunter, Dave and Dawn … Nice work! You have created a smooth balanced budget that allows you to enjoy your life while securing a safe retirement.
5 Ways to Trim Your Expenses That Won’t Kill Your Joy
In the spirit of this balanced savings conversation, I want to provide you with 5 quick ways to save money while still enjoying life.
1. Travel Hacking
This fine art of credit card reward redemption can help you and your family travel around the country or even the world for virtually no cost.
— Andy Hill (@AndyHillMKM) July 17, 2017
2. Reduce Your Grocery Bill While Still Eating Healthy
Earlier this year, my wife and I experimented with steps to reduce our grocery bill from $900 to $600 per month. The experiment was a success. We've been able to keep consistent with that 1/3 drop in spending while still eating healthy and tasty food.
3. Declutter Your Home
Using Craigslist, eBay and Facebook Marketplace to sell your STUFF can declutter and destress your life. You'll also make a decent amount of dough in the process. I have a free resource that allows you to save $1,000 in 3 easy steps without leaving home. I've included 2 additional bonus steps that help you save on your bills and insurance too.
4. Pack Your Lunch
Since I started consistently packing my lunch a year or so ago, I’ve been able to save about $1,000 per year. The side benefit is that I’m able to eat and stay healthy while I’m at work.
5. Cut the Cord on Cable
A few years ago, we decided enough was enough. You big cable companies don’t own me! Well … we still have internet payments, BUT we don’t have cable anymore. We’ve saved almost $1,000 per year since we said bye-bye and cut the cord.
Do you live by a savings rule?
What breakdown provides the most balance for you?