I’d like to start by directing you to a post by J. Money, one of my favorite PF bloggers, at Budgets are Sexy. In this post, J. refers to a recent article by money guru Jean Chatzky regarding the optimal budget. Here is Ms. Chatzky’s optimal budget, with commentary by J.:
Housing: 35% This includes not just your rent or mortgage, but utilities, maintenance, taxes and insurance.
Transportation: 15% Again, not just your car loan, but the money to pay for gas, parking and upkeep, as well as any taxis or public transportation.
Other Debt Repayment: 15% Not your mortgage or car loan, but student loans, credit cards or other debts.
Savings: 10% Non-negotiable (includes retirement contributions)
Life: 25% This is everything else. Your clothing, travel, health care, fun.
As you can see from the comments to J. Money’s post, people fall on both sides of this optimal budget, and by varying degrees. Here is where your hero falls; as a preliminary matter, please note that the number to the left of the slash (not Slash) represents my percentage at this time of year, when I’ve earned more than the limit of earnings on which Social Security may be taxed (for more information, click here, but in a nutshell, you only pay federal Social Security tax on wages up to $106,800 in 2009):
Housing: 25.4%/27.9%
Transportation: 0% (I don’t own a car and don’t have a good record for what I spend on cabs — I guess that would fall under Life)
Other Debt Repayment: 32.8%/36%
Savings: 14.6%/16%
Life: 27.2%/20.1%
So how do we feel about this? Well, according to Ms. Chatzky, I’m doing pretty well. I’m paying less than her optimal budget would suggest for Housing (mortgage payment, HELOC payment, condo fees, and utilities, including internet and cable TV — I’ll debate whether cable TV is a Housing cost or a luxury or Life cost) and Transportation (again, we can sidestep the debate as to whether I should be factoring cab costs in as Life or Transportation), am putting more into Savings than she suggests, am putting a ton more to Other Debt Repayment, and am spending more or less what I should be on Life.
So why do I feel like I could be doing better?
Well, to start with, I’ll note that this is a major approximation, partially because I’ve run these numbers on an approximate monthly basis. The problem is, no two months are the same! And yes, that is a problem! At the end of 2009, I’m going to have to re-run these numbers to see how I did on an annual basis. Obviously, my percentages change in the months after I stop paying Social Security tax, but regardless, my monthly budget is never exactly the same, which some (including yours truly) might say is a problem in and of itself. Plus, I refinanced this year, which I suppose represents an additional Housing cost; however, that has freed up more money that should probably be going to Other Debt Repayment. And I put my tax refund towards Other Debt Repayment, for the most part, which would change the numbers on an annual basis. And I fund a Flex Spending Account and am not sure exactly where to factor in those dollars…and what about copays and prescriptions?
But I digress, and, for that matter, I’ve gone cross-eyed — thinking about this stuff makes me crazy sometimes and keeps me up at night! OK, deep breath. The blogosphere wasn’t built in a day, and there’s plenty of time to tackle these thoughts in future blog posts. And I’m back.
Next, if you examine my figures closely, you’ll notice that my percentages have changed, perhaps in an unfavorable or unexpected way, now that I’m not paying Social Security tax. In a perfect world, I’d put all of this “found money” (that I get once I stop paying Social Security tax) towards Other Debt Repayment — but in reality, my monthly percentage is lower than when I’m paying that money as taxes! My Savings rate drops a bit, but my Life percentage goes waaaaay up! This means I’m spending this “found money,” and this is a problem. I’m really going to need to tighten the belt!
One issue is that costs just come up sometimes, and it’s tough to always budget for everything. For example, I had a large doctor’s bill pop up recently, and I also re-joined my gym, which I hadn’t necessarily been expecting to do. Fortunately, I’m able to “afford” (i.e., not go into additional debt to pay for) these items, but the money has to come from somewhere — and based on my current budget, that somewhere is always Other Debt Repayment. But the less I put towards my debt, the further I am from financial freedom and being able to sleep at night!
One big problem that I must address is that after I budget for my necessary costs (i.e., Housing, Savings, regular bills, etc.), I’m left with a pile that I don’t really refine any further. For example, I don’t say to myself, “TSF, you are only going to spend $X on food this month, $Y on entertainment, and $Z on the unexpected things that come up.” Sometimes I run out of toiletries and need to pick some stuff up. Other times, a friend from out of town arrives unexpectedly, and we go out for dinner. I also like to take my girlfriend out on the town every once in a while! While I recognize that this is my problem (i.e., I need to set a limit and not reach into the cookie jar when I want to spend more money), I see this as a problem with Ms. Chatzky’s Life pile: it’s easy to have a catch-all category, but if you’re not setting specific limits on what constitutes that category and how much you spend on each subcategory, you can find yourself in trouble. Plus, when these “unforeseen” expenses come up, where does the money come from?
I’ve read a lot about Dave Ramsey’s envelope system, and it’s something I’m potentially interested in exploring. I’ve also read a lot about ING Savings Accounts that can be customized easily into various sub-accounts for various purposes (i.e., travel in March, wedding coming up in May, and maybe a general “unforeseen expenses” category separate and above an emergency fund).
And I’ve digressed again! If it were up to me (wait a tick, it is up to me!), here’s about how my budget would look on an annual basis:
Housing: 25%
Transportation: 0% (again, factoring cabs in under Life)
Other Debt Repayment: 40%
Savings: 15% (I max my 401(k), so whatever percentage that is of my annual net income…let’s call it about 15%)
Life: 20%
Of course the figures will be different at the end of this year because I refinanced my mortgage — so my monthly payment shrank, but I came out of pocket to shrink it. I’m sure there’s an accounting mechanism that would help me flesh this out, but I’m not an accountant!
Anyway, I will revisit this post later in the year to see how I did, and I hope to have some detailed posts in the future about where my money goes each month. I still have a lot of work to do in refining my own budget and yardstick, and I think the end of 2009 will provide a good time to sit down with a pencil and paper and crunch some numbers. But in the meantime, I’m interested in hearing what is your optimal budget, rather than how you measure up to someone else’s yardstick.
Thirtysomething Finance 