The "B" Word

In personal finance, it all starts with cash flow. What comes in versus what goes out. How healthy is your personal cash flow? There are usually two camps- those who are always tight at the end of the month and can't figure out where the money goes, and those who have a surplus but don't necessarily know the best place to hold it.

Let's focus today on the first group, because that is the one with which I identify best. And by identify, I mean exemplify, because I am a spender. So we are going to use the dirty "B" word- budget.

 Wait! Don't leave yet. I know you hate budgets. I hate budgets. In financial planning 101, we begin by marking down every expense you have and breaking them down into 100 specific categories. Who has time for that? And what happens when I go over-budget in one category but under in another? And why do I feel so damn guilty every time I write down the amount of the concert tickets line item? (Mom, don't answer that).

Which is why I LOVE the 50/30/20 budget from ELizabeth Warren's fantastic book "All Your Worth", co-authored by her daughter Amelia Warren Tyagi. The premise is simple- structure your budget so that 50% of after-tax pay goes to "must-have" expenses, 30% to "wants", and 20% to "savings". So far, so good.

Your "must-have" expenses are those that must be paid every month regardless of your situation. Housing, utilities, debt repayment minimums, and basic food costs are all considered "must-haves". 50% was not chosen merely because it is a nice, round number. "Must-have" expenses are kept at 50% because if you were to lose your job and collect unemployment, or go from two incomes to one, or collect disability insurance, you would likely receive approximately half of your current take-home income. This means that in tough times, you could shed your "wants", pause your "savings", and still survive without tapping into savings or going into debt. Click here to download a basic "must-haves" calculator from It's Your Money and see where you stand. Even if your expenses are within 50%, experts agree monthly debt obligations (including mortgage payments) should remain within 36% of your gross monthly income. 


 The "savings" category of 20% includes contributions to your emergency fund, retirement accounts, and debt repayment over and above the minimums. Debt repayments are included because the more debt you pay off, the more wiggle room you have in case of emergency. Note that these are long-term savings, not future "wants" savings.

 Finally, my favorite- the "wants" category. Shoes, shows, or sushi, you are free to spend 30% on anything your heart desires. Big wants require saving up your monthly wants allowance until you can afford it. Elizabeth and Amelia understand that in order to enjoy life, you have to have the freedom to spend a little discretionary cash here and there. In fact, they suggest using cash for your "wants" so that you don't overspend. Personally I would rather track my purchases and get some credit card points, but if you are prone to overspending it may be a good idea to leave your cards at home and only take out as much cash as you have to spend.

Some expenses fall in two categories. The most common is food. We all have to eat, but does it HAVE to be wild-caught salmon with truffle mashed potatoes and organic asparagus? While some of you will agree with me that it does, the truth is that a single American can survive on $200 a month. This is more than food stamps provides. So put $200 in the "must-have" category and the remainder in "wants". Another one is  basic household needs. Yes, you need shampoo, but it does not have to be Aveda. I find that the majority of my "wants" category is food and music. Yours may be clothes, movies, or cars. Yes, cars. If you want a car that is beyond your budget, you can save your "wants" money until you have a large enough down payment that car loan payments are safely within your "must-have" budget (although even better is saving enough to pay for the car outright).

While I enjoy the simplicity of three categories, I strongly encourage you to reduce your "wants" category to 25% and add a 5% "Giving" category. While most of people unconsciously do so throughout the year, I find that adding donations and gifts as its own category benefits my charitable strategy and allows me to plan ahead which non-profits I will support. 10% giving is my goal, but I am not there yet.

The best online tool I have found for monitoring your budget is mint.com. It is free, easy to use, and they email alerts when you are over your budget in a certain category. You can even track your savings and debt repayment goals.

Let me know how your budgeting goes, or if you have additional tips that work for you.

Welcome to the 30s

It is said that the 30s are the new 20s. Sounds great, right? Credit card debt, student loans, weddings, first home purchases... many of the life experiences (and expenses) attributed to your 20s now occur in your 30s. At the same time, we are told by financial experts that our retirement accounts should be flush by 30. So how to get your financial house in order in your 30s?

My goal is to simplify information on saving, investing, and spending so you can find financial stability while enjoying life. Information that all of us can use. We all have access to information, and thousands of financial experts are willing to share their secrets to financial health. But too often, these sites make us feel guilty. Guilty for going out on an expensive dinner with friends, guilty for not monitoring our credit score monthly and researching investments weekly, and guilty for not thinking about our net worth constantly. I'd like to share the tips and lessons of financial advisors you can use and then move on to more important things, like the people and activity that feed your enjoyment of life.

I began blogging on my co-worker's excellent young professional blog, "Personal Finance for the 20something." As a financial professional, I read a lot of other articles, blogs, and books on personal finance. What I've found is a lot of information for young people just starting out, and massive amounts for those ready to enter retirement. Not a lot for those of us in the middle. Why? Because it's hard. We know what to tell you to do in your 20s, because compounding interest helps those who save early. We know that if you are contemplating retirement, there are certain steps you need to take to prepare. But where are you in your 30s?

For some of us, the 20s were a decade of exploration and experiences. Many studied abroad, moved around the US, ski-bummed it for a few seasons, and then finally decided to settle down, pay off debt, and begin saving. There are others who entered the work force immediately, saved 20% of their income each year, and are in a good place financially. And then there are those who continued their higher education long after college and find themselves finally entering the workforce with multiples letters after their names and multiple digits in their student loan balances. Everyone is at a different place in their 30s. And I realize that even more acutely now that I am here as well.

Two of my close life-long friends who live in our hometown exemplify this dichotomy. As we caught up over brunch, it occurred to us that 30 was not what we expected. As one pointed out to the other, "we are both 30, single, and living with our parents". I laughed because these are two of the most accomplished women I know, with graduate degrees (a PhD in one case and a master's in the other), travelled (one just returned from teaching at a women's university in Bangladesh and the other has lived in Japan, India, and Italy), and full of life. Life is often not what we expect because it becomes more than we ever expected. I hope to help you get your finances under control so you can sit back and enjoy whatever life throws your way.