The Working Backwards Series: How Much Savings Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, and making $74,000 a year (the average household income in Austin).

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards SeriesHow Much Auto Can I Afford? 

Topic For This Post: Savings

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It sounds funny doesn’t it? How much savings can I afford in my budget? The fact is that most Americans try to save money AFTER they have paid all their bills and come up woefully short of their savings goals. A better way to save is to budget savings in your spending plan each month to ensure our savings goals are met.

“Those who understand financial freedom learn to save first, then spend what is left.”

Let’s start with a couple assumptions. Let’s assume we are living on a balanced budget (spending less than you earn) and earn about $74,000 a year, which is the average household income in Austin Texas. Let’s also assume that we are a family of four, with dual incomes and just getting started with our savings.  In this scenario, most families can afford up to about 15% of their NSB to go towards savings and investments. 

What Does The Budget Look Like – The Math

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A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 15% of our budget going to savings and investments, that’s roughly $685/month for savings or, $8,220/year.  Let’s take a look at our budget  to see if we can meet our balanced budget objective:

Budget (% of Net Spendable Budget by category)

Housing (All Expenses)           30%

Autos                                              14%

Food                                                 12%

Insurance                                         4%

Medical                                             2%

Debt Service                                     5%

Savings/Investments                   15%

Entertainment                                5%

Clothing/Shoes                               5%

Vacation                                            8%

Total:                                           100% of Net Spendable Budget (NSB)

So from a budgeting standpoint, we can make a balanced budget with 15% of Net Spendable Budget going toward savings and investments, without jeopardizing important budget items like housing, autos or food.

But What Are We Saving For?

What are we saving for? Why is it important to dedicate an entire 15% of our monthly budget to savings? It helps to know why we are socking money away each week. It motivates us to keep going when life’s obstacles or temptation gets in our way. That new pair of shoes. That incredible new car deal. That opportunity to travel the world on a whim. All of these situations vie for our precious dollars so it helps to list, specifically, what we are saving for. Here are the top four reasons to save money in our budget.

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Emergency Fund

First and foremost is an emergency fund. This is money set aside for true emergencies. An emergency fund is the number one way to keep out of debt. The most successful people I know have the rules written out that both define what an emergency is and how much can be used toward that end. Emergency to me means something that threatens my family, my health or my method of providing for my family. Nothing else.

How much emergency fund is enough? Where do I keep my emergency fund? These are both good questions and the right answers depend on the temperament and situation of the family in question. Most pundits agree that somewhere between three months and twelve months of expenses is the right range for an emergency fund, depending on your risk adverseness. Location of the emergency fund can be anywhere from inside your mattress to secure investments, but key to the location is that the money needs to be accessible and have low risk of losing its value. When you have an emergency, the money must be there.

What does saving an Emergency Fund, (EF),  look like? Since we are just starting out, we want to get $1,000 in the EF immediately and then at a slower pace, build the EF up to 3 to 6 months of savings. So, in month 1, all $685 of savings will go the the EF and most of month 2’s savings as well to get to $1,000. Then we will put $300/month into the EF each month thereafter.

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Retirement Savings

The second reason to save is for retirement. There are many theories about how much and where you should save for retirement but the fact remains that we must prepare for life after full time work and/or old age. It is not our children’s responsibility to take care of us when we are old but our own. How much do we save? As a general rule, target 25 times your annual expenses as the amount you want for retirement. And though this amount varies for each individual, there are some smart rules to follow:

  1. Start saving for retirement early, letting compounding help you meet your number.
  2. Take advantage of tax preferred accounts like 401K, SEP and IRA accounts to minimize taxes
  3. Take advantage of employer matching plans and/or other employer retirement benefits

Practically, what does that look like each month? In month’s 1 and 2, all money essentially goes into the emergency fund to build it up to the $1,000 minimum. After that, we will put in 3% ($137) of our NSB into a retirement plan (401K) along with the employer’s match of 2% ($92) for a total of 5% of NSB or $228/month.

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For those raising families or expecting to raise families, we need to be saving for known children expenses, including school, marriage, cars and other events (think prom, field trips, etc) that are assumed to occur. For most of us, this can be done over many years so a slow and steady savings can meet your needs. Why not start savings accounts for each child on the day they are born? I recommend putting $75/month aside for each child from birth. In this example, we have two kids, so that’s $150/month. It’s easy, and by using auto-drafts between my bank and investment accounts, I don’t even see or feel the money leaving my account. Where should we save this money? 529 Plans come to mind for college savings. An Index Mutual Fund or ETF can work for other needs. But they should be separate from our day-to-day funds and take advantage of tax preferred accounts if we know the money will be used for higher education.

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Short Term Life Savings

Life happens and it can be expensive. All of us have autos, furniture, appliances and other items that wear out or need upgrading over time. We need to be saving for these eventualities. Since these savings are short term in nature, less than 10 years, the money needs to be invested in something that is safe but hopefully returns more than the cost of inflation. Maybe a safe low cost, low turnover mutual fund or an ETF. Saving $100/month in an index mutual fund allows me to have money available when we need it for new purchases to replace old or worn-out items.

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Total It All Up

What are we looking at when it comes to savings as a percentage of net income? When you add it all up, it really is around 15% of our net pay. Wow! Some people even suggest it should be much higher but with two children, we will settle of 15% for now.

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, auto, children’s needs, etc, does not have much room for savings but we MUST save in order to meet our long term goals and dreams. Plain and simple. While most of American families try to save AFTER they pay all their bills, that method rarely works because there is rarely money left over. In fact,  I believe that trying to save money after bills are paid is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like vacations or special events (think weddings or cars).

What’s The Solution

Savings must be a part of the monthly family budget. Savings is as important as the rent, food or the auto payments. Why? Because savings (which can be placed in investments) can generate the wealth needed to fulfill goals and dreams. Want to retire some day? Savings is the answer. Want to send your kids to college? Savings is the key. Want to stay out of debt? Saving, in the way of an emergency fund, is the only way to prevent credit card debt when (not if) an emergency occurs. It looks like this:

Emergency fund: $300/month

Retirement: $137/month plus $92/month in company match – Total: $229

Children’s Savings: $150/month

Short Term Needs Savings: $100

Grand total: $779/month including company match on the retirement savings

Many successful personal finance individuals like to turn the savings and spending relationship around. Instead of trying to save what’s left after spending, they say they like to spend what’s left after saving!

Final Word

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Living in financial freedom does not allow for families to try and save money from what’s left after spending. It requires us to budget savings along with other important budget categories to ensure savings occurs each month.  Today, we found that a family of four, living on an average Austin household budget can afford to save about $685 per month and save in four broad categories: Emergency Fund, Retirement Savings, Generational Savings and Short Term Life Savings.

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While many times we go to the credit card to stretch our spending, going into debt because we have no savings is not the answer. Fight to be credit card debt free. Live on a budget and use cash or a debit card. Some people have the discipline to use their credit card and immediately pay it off, essentially making it like a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. The temporary enjoyment of buying food or eating out with credit is short lived compared to the lengthy process of paying off the debt. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it.

“The faces all around me they don’t smile they just crack
Waiting for our ship to come but our ships not coming back
We do our time like pennies in a jar
What are we saving for”

(Believe by The Bravery)

The Working Backwards Series: How Much Food Can I Afford In My Budget?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home.

While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards SeriesHow Much Auto Can I Afford? 

Topic For This Post: Food

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Let’s get right to it: How much food for our family of four can we afford in our budget? And by food we mean both groceries as well as eating out. While some people want to live “large” and eat out at every opportunity, some others find eating out frivolous and minimize it, only to eat at home. In either case, it is worth the effort for each person or family to think through their food spending or risk the issue of significantly overspending.

Let’s start with a couple assumptions. Let’s assume you have an Emergency Fund already in place and that you are saving 15% of your net spendable budget (NSB, total income minus taxes and charitable donations). Let’s also assume you are living on a balanced budget (spending less than you earn) and earn about $74,000 a year. In this scenario, most families can afford up to about 15% of their NSB to go towards groceries and eating out. 

What Does That Look Like – The Math

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A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 14% of our budget going to groceries and eating out, that’s roughly $639/month for food or, $7,666/year. That is $160 per person per month, not very much when you figure that’s 3 meals a day  and snacks for the entire family!  Let’s take a look at our budget  to see if we can meet our balanced budget objective:

Budget (% of Net Spendable Budget by category)

Housing (All Expenses)           30%

Autos                                              14%

Food                                                 12%

Insurance                                         4%

Medical                                             2%

Debt Service                                     5%

Savings/Investments                   15%

Entertainment                                5%

Clothing/Shoes                               5%

Vacation                                            8%

Total:                                           100% of Net Spendable Budget (NSB)

Wait a minute, we allocated 14% of our NSB for food, yet the math above only shows 12%, what gives? For this budget exercise, we took a portion of the Entertainment budget (2%) to add to the food budget of 12% to total the 14%. We did this to recognize that eating out is a popular form of entertainment. So from a budgeting standpoint, we can make a balanced budget with 14% of Net Spendable Budget going toward food and dining out, without jeopardizing important budget items like housing, autos or savings.

What Does This Mean For Our Budgets?

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What does this look like? Simple math shows us that this budget breaks down to $136/week in groceries and $24/week for eating out. Yikes! You can’t go out to eat with the family of four for $24/week! If you said that you would be right!

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, auto, children’s needs, etc, does not have much room for groceries and eating out. Plain and simple. While most of American families can make their food budget when they make their own food at home, most of us struggle, or go over budget when they factor in the costs of eating out. In Austin, eating out is so common it is almost considered a right instead of a privilege. And while most of us want to do it regularly , most of us can’t afford it. Ouch. But true. Yet most of us are trying to do just that. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like vacations or special events (think weddings or cars).

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What’s The Solution

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There are really only a handful of acceptable actions to keep us within our food budget: 1) Eat at home, prepare your own food and shop frugally  2) Eat out infrequently or very cheaply: tacos anyone? 3) Save up money and go out to eat at a little nicer place to eat once a month.  4) If your budget still needs stretching, shop groceries at big box stores or discount stores to find a better value. But you must be careful because bulk purchases can get expensive, so you must show discipline in limiting your purchases.

Final Word

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Living in financial freedom does not allow for large food and eating out spending that drains our bank accounts and ruins our budgets. At least not for a family of four. We found here today that a family of four can only handle about $639/month for food each month.

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While many times we go to the credit card to stretch our spending, going into debt for food is not the answer. Fight to be credit card debt free. Use cash or a debit card. Some have the discipline to use their credit card and immediately pay it off, essentially making it like a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. The temporary enjoyment of buying food or eating out with credit is short lived compared to the lengthy process of paying off the debt. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it. Eat well and live financially free!

Need help with your budget? Here’s a GREAT resource. Click the link and SAVE!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

The Working Backwards Series: How Much Clothing & Shoes Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home.

While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards SeriesHow Much Auto Can I Afford? 

Topic For This Post: Clothing & Shoes

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Let’s get right to it: How much clothing can we afford in our budget? While some people want to live “large” and enjoy the latest fashions, some others find clothing frivolous and minimize it. In either case, it is worth the effort for each person or family to think through their clothing spending or risk the issue of significantly overspending.

Let’s start with a couple assumptions. Let’s assume you have an Emergency Fund already in place and that you are saving 15% of your net spendable budget (NSB, total income minus taxes and charitable donations). Let’s also assume you are living on a balanced budget (spending less than you earn) and earn about $74,000 a year. In this scenario, most families can afford up to about 5% of their NSB to go towards clothing and shoes. 

What Does That Look Like – The Math

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A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 5% of our budget going to debt payments and elimination, that’s roughly $228/month for clothing or, $2,737/year. That is not very much when you figure that amount must cover the entire family!  Let’s take a look at our budget  to see if we can meet our balanced budget objective:

Budget (% of Net Spendable Budget by category)

Housing (All Expenses)           30%

Autos                                              14%

Food                                                 12%

Insurance                                         4%

Medical                                             2%

Debt Service                                     5%

Savings/Investments                   15%

Entertainment                                5%

Clothing/Shoes                               5%

Vacation                                            8%

Total:                                           100% of Net Spendable Budget (NSB)

So from a budgeting standpoint, we can make a balanced budget with 5% of Net Spendable Budget going toward clothing, without jeopardizing important budget items like housing, autos, food or savings.

What Does This Mean For Our Budgets?

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The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, auto, food, children’s needs, etc, does not have much room for purchasing clothes and shoes. Plain and simple. While most of American families spend far more than $228/month on clothing , most of us can’t afford it. Ouch. But true. We certainly can’t afford overspending on several budget categories in addition to clothing. Yet most of us are trying to do just that. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like vacations or special events (think weddings or cars).

What’s The Solution

There are really only a handful of acceptable actions to keep us within our clothing budget: 1) Take advantage of discounts, coupons, sales and off-season specials to keep your clothing spending down  2) Purchase clothing at discount stores like TJ Maxx or Ross Stores. 3) Buy used clothing at thrift stores or consignment shops  4) If you do need to purchase high fashion clothing, which can be expensive, you’re going to have to show discipline in limiting your purchases.

Final Word

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Living in financial freedom does not allow for large clothing spending that drains our bank accounts and ruin our budgets. At least not for a family of four. We found here today that a family of four can only handle about $228/month for clothing and shoes each month.

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While many times we go to the credit card to stretch our spending, going into debt for clothing is not the answer. Fight to be credit card debt free. Use cash or a debit card. Some have the discipline to use their credit card and immediately pay it off, essentially making it like a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. The temporary enjoyment of buying clothing with credit is short lived compared to the lengthy process of paying off the debt. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it!

 

Need help with your budget? Here’s a GREAT resource. Click here and SAVE!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

The Working Backwards Series: How Much Debt Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home.

While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards Series: How Much Auto Can I Afford? 

Topic For This Post: DEBT

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The rich rule over the poor, and the borrower is slave to the lender. Proverbs 22:7

Debt payments are innocuous. Each individual payment is very small in relation to the value or cost of the item purchased. But over time they add up to costing far more than the actual item purchased.  Yet, for many of us, debt seems to be the only way we feel able to have important items like autos, homes, education, vacations and other expensive items. But, the question still stands: How much debt can we afford in our balanced budget?  We have to take a shot at properly budgeting for our debt. To do it right, we need to budget so we can aggressively pay down and eliminate our debt.  For the purposes of this exercise, we will look at a debt budget for consumer debt only. Meaning: credit card debt. You can see from previous “The Backward Series” posts, we have allocated money for other forms of debt payments in their respective budgets, ie. cars, homes, etc. Also, we will assume that this family is trying to eliminate consumer debt completely from their lives while at the same time enjoying themselves in their beautiful city.

What percentage of our budget is allocated to debt payment? In our balanced budget, the total debt budget varies from home to home, depending upon how much debt the family has. For today’s budget exercise, we will start at 5% of our take home total income, or net spendable budget (NSB), to service credit card debt.

What Does That Look Like – The Math

A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 5% of our budget going to debt payments and elimination, that’s roughly $228/month for debt payments or, $2,737/year. That is not very much when you figure the costs of interest and fees eat up a large part of that budget. Let’s take a look at our budget by “backing into” the debt budget to see if we can meet our balanced budget objective:

Let’s take a look at a balanced budget to see if 5% is reasonable: (% of NSB by category)

Housing (All Expenses)           30%

Autos                                       14%

Food                                        12%

Insurance                                  4%

Medical                                     2%

Debt Service                             5%

Savings/Investments              15%

Misc.                                          5%

Entertainment/Clothing           5%

Vacation                                     8%

Total:                                           100% of NSB

So from a budgeting standpoint, we can make a balanced budget with 5% of Net Spendable Budget going toward debt payment, without jeopardizing important budget items like savings, vacations and entertainment, (15%, 8% and 5% respectively), which is healthy.

But the real question is: How much debt can we take on in a given year and still eliminate it by year end? In this case, that is $2,737 for the entire year going toward credit card payments and elimination. The short answer is it is going to be very little. If we assume an average but expensive credit card interest rate and other simplifying assumptions, we find that $2,737 in total debt payments a year equate to roughly only $2,100/year in actual charges on our card. The rest of the money is for interest payments. That’s only about $175/month on our card balance each month. Not very much. So, what does that mean?

What Does That Mean?

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Although credit card debt sometimes seems like the American way, it is not a good use of our money. The point is that a balanced budget has little room for servicing credit card debt. Plain and simple. We can’t, and shouldn’t, incur credit card debt month over month. If we have to use a credit card, we should really use it as a debit card where the balance is fully paid off each month. Yet most of us are carrying credit card debt because we are impatient or imprudent.  In fact, the American household average 2015 credit card debt is $15,355! (Nerdwallet) And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like new homes or cars or special events (think vacations, weddings or cars).

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What’s The Solution

There are really only a couple acceptable credit card actions to keep us within our budget for debt elimination: 1) Pay cash instead of using a credit card.   2) Use a debit card instead of a credit card. 3) If we use our credit card, use it like a debit card and pay the balance off each month. 4) If we do get a balance on our card, make it a priority to pay the debt off within the year so it does not accumulate into something that becomes insurmountable, (And break the budget).

Final Word

Living in financial freedom does not allow for carrying credit card balances that drain our bank accounts and ruin our budgets. We found here today that a family of four living in Austin Texas can only handle about $228/month in credit card payments, yet, the average American today pays almost six times that amount each month!

Fight to be credit card debt free. Use cash or a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it. Because that money we are not paying credit card companies in the form of interest payments can be better used to fund our goals and dreams.

Want some help getting out of debt? Try this GREAT resource. Click here and SAVE!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

The Working Backwards Series: How Much Vacation Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home. While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards Series: How Much Auto Can I Afford? 

Topic For This Post: VACATION EXPENSES

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Vacation spending, especially around the Christmas/New Year’s timeframe is normally one of the larger expenses in our budget at the start of the year, so “right sizing” our vacation costs is essential to living in financial freedom with a balanced budget.  How much vacation can we afford in our balanced budget? It is a tricky and emotional question. Americans are passionate about their vacations. The question has many variables too, including how many vacations in the year? And, do we vacation with or without the children or extended family? But, vacation spending is one of the biggest budget busters, mainly because we tend not to budget for them in the first place. The result: credit card debt. So we have to take a shot at properly budgeting our vacations to ensure there are no costly surprises, namely, debt! For the purposes of this exercise, we will look at a vacation budget for one large family vacation and one small couple-only budget in a given year

What percentage of our budget is allocated to vacations? In our balanced budget, the total vacation budget varies from home to home, depending upon how important vacations and vacation travel is to the family. For today’s budget exercise, we will start at 8% of our take home total income, or net spendable budget (NSB), after taxes and charitable donations).

What Does That Look Like – The Math

A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 8% of our budget going to vacations, that’s roughly $365/month for vacation costs, or, $4,380/year. Total. I know, that is not very much when you figure the costs of travel alone eat up a large part of that budget. Let’s take a look at our budget by “backing into” the vacation budget to see if we can meet our balanced budget objective:

Let’s take a look at a balanced budget to see if 8% is reasonable: (% of NSB by category)

Housing (All Expenses)           30%

Autos                                       14%

Food                                        12%

Insurance                                  4%

Medical                                     2%

Debt Service                             5%

Savings/Investments           15%

Misc.                                          5%

Entertainment/Clothing      5%

Vacation                                     8%

Total:                                           100% of NSB

So from a budgeting standpoint, we can make a balanced budget where we have allocated all of the NSB, including savings at 15%, which is healthy.

But the real question is: Can we have two travel vacations a year on the amount set aside for vacations? In this case, that is $4,380 for two vacations.

The short answer is it is going to be really hard. We probably can’t have two fabulous travel vacations a year including one with the entire family because air travel alone will eat up a vast amount of that budget. Not to mention hotel, food, transportation and the ever important entertainment costs. But we could vacation very well if we can reduce our travel costs, i.e., no air travel. Maybe the family vacation is a trip to the coast or mountains, by car, staying in a modest hotel or with friends or family and enjoying what that areas has to offer. Maybe the couples vacation is a little more romantic or exotic: A short trip to a city, beach or ski resort with great food and fun.

So What Is All The Fuss?

The point is that a balanced budget for an Austin, Texas family of four on an average household income and with many essential budget categories like housing, auto, food, children’s needs, etc, does not have much room for vacation expenses. Plain and simple. While most vacations do not include exotic travel, it would be nice to have at least one of those trips every now and then. But the fact is, a family of four typically requires between $3,500-$8,000 for a moderate but nice vacation with air travel, accommodations and entertainment. We certainly can’t afford “cost is no object” travel vacations. Yet most of us are trying to do just that in the name of “we deserve it”. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like new homes or cars or special events (think weddings or cars).

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What’s The Solution

There are really three or four viable options to keep within our budget for vacations: 1) Vacation locally or for shorter periods of time to reduce travel costs or housing costs.   2) We could vacation with friends or family to reduce the costs. 3) We could stay with friends or family who have accommodations at desirable locations.  4) We could use some variation of a “stay”-cation where we drastically limit travel and housing costs to allow for more money for entertainment and activities.

The reality here is that vacationing is expensive.  Let’s face it, borrowing money to vacation is even more expensive. What is the best plan if you want to have two nice vacations a year is really up to you and your family? But do everything possible to save your money in your budget so you can vacation without incurring debt.

Final Word

Vacation spending, and over spending,  is a huge component in family credit card debt because it is one of the biggest budget busters (with autos and entertainment, too) and can force us into an un-sustainable budget.  And that’s even before we get into vacation entertainment expenses. The best way to control your vacation expenses is to budget for those vacations and find vacations that are fun and rewarding without breaking the bank. Or get real creative in how we vacation, like stay with family, share costs with friends or make great “stay”-cations which drastically reduce travel and housing costs. If you must vacation bigger than 8% of your budget, and many of us want to, carefully consider where you can cut other expenses in your budget so you can do so without incurring debt.

Vacations are necessary for us and our families and therefore need to be budgeted for. A family of four must correctly size their vacations in order not to incur debt that can become a burden on the family and the family budget. Smart planning and setting proper expectations can prevent you from overextending and allow you to maintain a balanced budget that keeps you living in financial freedom!

 

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

The Working Backwards Series: How Much Car Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “what money is available given our lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas and making $74,000 a year (the average household income in Austin).

What are we trying to accomplish? We want to show what a balanced, sustainable budget looks like, and one way to do that is to “back into” the dollar amount for each budget category given life choices: Raising two children in a two income home. While we understand we can spend more in categories that mean a lot to us, and each family is different, we want to set expectations that the discipline of a balanced budget, (spending and saving less than we make), requires conscious decisions, sacrifices and tradeoffs to meet our long term goals and desires that include financial freedom.

Topic For This Post: AUTOMOBILES

How much automobile(s) can we afford in our balanced budget? It is a tricky and emotional question. Americans are passionate about their cars. The question has many variables too: If we own our cars outright, then our auto expenses are just operating costs like gas, insurance, repairs, etc. But if we have an auto loan(s) or worse, lease(s), we have monthly payments that must be factored in as well. For the purposes of this exercise, we will look at the budget with and without auto loans on each car. Ouch! I know, having two car payments is expensive, but sadly, two auto loans (or leases) in a family are more common than not.

What percentage of our budget is allocated to autos? If we own your cars, the operating costs of those autos can be less than 5% of your net spendable budget (after taxes and charitable donations). With auto loans, it can be three times that. For today, we will assume that our budget percentage for autos in 14% of our net spendable budget.

What Does That Look Like – The Math

A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 14% of our budget going to autos, that’s roughly $639/month for auto costs. Total. I know, that is not very much when you figure the operating costs of gas and insurance eat up a large part of that budget. Let’s take a look, assuming each well-running car, that are insured to good, safe mature drivers does 10,000 miles a year

Monthly insurance for two autos:                $125

Monthly gas:                                                     $150

Repairs/Misc (Register, etc)                             $ 50 (Optimistic)

What’s left in the budget:                               $289

What does this say? It says that IF we have two well running cars with limited repairs, good gas mileage and limited monthly mileage, we only have $289 to service any auto loans or leases. That could be either one loan up to $289/month, or two $145 auto payments. Have you heard of an auto loan as low as $145/month? Not me. Furthermore, what does that mean? It means we are not driving brand new BMWs. It means we are probably not driving new cars at all, but used cars. I think it really means that a family of four with two cars needs to own AT LEAST one of the two cars in order to make their budget work.

So What Is The Fuss?

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, food, children’s needs, etc, does not have much room for auto loans or leases. Plain and simple. While the vast amount of cars on the road today have some form of loan or lease associated with them, most of us can’t afford them. Ouch. But true. We certainly can’t afford most of the high priced sports cars, custom trucks or expensive people movers (think supersized SUVs) on a loan or lease. Yet most of us are trying to do just that. And I believe that is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings or funds for emergencies.

What’s The Solution

There are several. We could end out fascination with cars, but that’s not going to happen. We could end our fixation on new cars and buy used to make our budgets balance. We could try to be one car families although that could be tough in a two income household. We could save our money and buy our cars with cash. That is really the answer. Each month, save an amount of money that, over time, allows you to purchase a car with cash when it is needed. How do we do that on a tight budget? First, get rid of all your consumer and auto debt that you currently have. Do everything possible to get out of debt so that all your money could go towards your needs and not your loans. Let’s face it, borrowing money is expensive. Next, each month, set aside money in a savings account or investment. If you need a car in five years, that’s 60 payments to your savings to go toward your next car. How much do we save? Well, if the budget for the next car is $12,000 (think used car), that would be $200/month. For two cars that would be $400/month which sounds like a lot. But when you consider that the average household spends $499/month (source: Experian) on loans/leases alone, it is considerably less AND you own the cars outright!

Final Word

Auto expenses are one of the three biggest budget busters (home and entertainment) and the main culprit is our auto loans and leases. The best way to control your auto expenses is to own your vehicles and not have outstanding auto loans. If you must finance your autos, be careful not to “break the bank” on financing that prevents you from maintaining a balanced budget and living in financial freedom!

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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness