How to Budget and Save Off the Top

Mr BA said to me the other day, “We really don’t have a budget, do we?” 

When I heard this question, I saw the cartoon version of myself turn to the camera as my head exploded off my body and spurted blood everywhere for a while.  Then after a second to regain composure I evenly replied, “No, we do not have a budget – we save off the top! Plus we monitor our expenses month to month in order to understand what we spend annually and ensure we are saving enough for financial independence (aka early retirement).”

This is a funny question to me as Mr BA has been a proponent of tracking expenses for a while to see where our money was going as opposed to creating a budget or starting to save right from the get go. I, on the other hand, have always been a natural planner and so my tendency was to create a budget and jump right to looking for areas that could be cut back without much monitoring. This made sense, right? I had just started to learn about financial independence and so I could immediately see areas of opportunity in our budget. Full speed ahead. Or, so I thought. 

What is a Budget? 

A budget is a plan for your money over a period of time. That period of time could be a month, a quarter or even a year. Or, however long you need to reach a goal. 

I have made budgets when we were saving for something big like a wedding, a home purchase, or a car purchase. But, I was not a person who tracked spending or savings on any regular basis. 

Reverse Budgeting or Pay Yourself First

Reverse budgeting or paying yourself first suggests you budget to save first over paying your bills. This technique could work if you are struggling to save an emergency fund or start saving for retirement since you focus on these things before other goals. If you contribute to a 401k right out of your paycheck you are reverse budgeting, by saving first before paying other bills.

To create a reverse budget you list your saving goals of all kinds. Start with an emergency fund if you don’t have one already started then move on to retirement and other goals. Determine your time frame or by when you want to have your emergency fund fully funded and divide by the number of paychecks you’ll receive between then and now and that will be the amount you save out of each paycheck toward that emergency fund or goal. The rest of your paycheck would be used to pay for food, housing, clothes, utilities, and transportation.  So what’s a reasonable amount to be saving each month? Well that depends on your situation. 

50/30/20 Budget

Proponents of the 50/30/20, created by Harvard economist Elizabeth Warren (yep, the US Senator from Massachusetts and Democratic candidate) and her daughter, Amelia Warren Tyagi (link), say you should budget 50% of your after tax take home pay for necessities, 30% on wants, and leave 20% to save and repay debt. 

70/20/10 Budget

Another school of thought says your take home pay should be budgeted into 70% living expense, 20% savings (10% on retirement, 5% on emergencies, 5% on goals like a vacation, car, new phone) and 10% on debt repayment like credit cards, student loans, car note. Easier but not much focus on debt repayment.

80/20 Budget

Are you starting to see a pattern here? These permutations can go on and on and will depend on each person’s or family’s situation and that’s okay. Both budgets require tracking of expenses and savings. With 50/30/20 you have to be able to discern between a need and a want which doesn’t sound too hard except when you start putting it into practice. For example, regarding grocery store trips, are you really going to go home and look at your receipt and break out the potato chips and lip gloss from the ingredients for your lunches and dinners? Nope. Or if you go out for breakfast are you going to break out that 3rd cappuccino from the first two you had with your breakfast? Not likely.

With the 70/20/10, you are also saving 20% but with more guidance around where your savings go (retirement, emergency fund, other goals). Both require tracking which not everyone wants to do or can do over the long term. 

Enter the 80/20 budget. This budget stipulates you save 20% off the top and the rest is what you live on how ever you want. Automation works well for this because you can save into your retirement plan out of each paycheck, then automate the rest into your savings or brokerage account shortly after payday or directly from your paycheck via your employer.  Many employers will allow you to split your direct deposit into multiple accounts. No need to track the remaining 80%. 

Any of these methods can work if you look at your situation when you start to set up your budget and you are honest with yourself. You need to find something that will be sustainable for you long term. Keep in mind, these are just methods to get you started and none of these guides are set in stone.  So as your income or situation changes you can adjust the saving rate higher. Pretty soon your 80/20 becomes the 70/30, the 60/40 and so on. 

How to Start a Budget where you Save Off the Top

To get started you are going to make a list of your income, expenses, and savings for each month.   This a bit different list than what you need for net worth.

Expenses

For expenses you can use an average over the past quarter or year given they might be slightly variable like electric or water. You can use your credit card or debit card statement to get a good idea of monthly expenses.

Income & Savings

If you have variable income, you can use an average over the past year or quarter or you can base your budget on a month with your lowest income. When looking at saving don’t forget to include any 401k contributions which are automatically invested out of your paycheck. This should give you a good starting point.

Quick Calculation

From your income subtract expenses and savings and see if there is any left over. If there is left over you can save move, if the number is negative then you need to make some adjustments. 

Don’t Forget

Did you include expenses that occur only a couple of times a year or once a year? Did you include things like birthday and Christmas presents? Have you accounted for a new vehicle purchase you need to make in the future? And did you include all debt repayment?   If not factor these things in. 

Budgeting Applications – Automate Savings! Yes Please!

Budgeting applications are an excellent way to track your income and expenses month to month and even more frequently if you’d like. A quick google search will show you tons of options. 

Mint Personal Capital and YNAB

I’ve used mint.com for many years now and I like that it’s a free app. I’ve used their budgeting functionality but I’ve found more value in the expense tracking capabilities and trending. It connects with your banks, credit cards, investments, mortgage company, etc and does a pretty good job of pulling it all into one place. I have to spend time categorizing transactions, but I find their trending capabilities just what I need month to month.   Personalcapital.com is great for seeing overall picture and it also has expense tracking and budgeting capabilities. A few couples I know use YNAB, which cleverly stands for You Need a Budget. The ChooseFI podcast has a great episode with the owner and creator of YNAB. Check out the episode here. Never the less, this area is vast so do your homework and find one that you like to use over the long term. 

16 Budgeting Tips to Get you Started with Savings

1. Budget with your spouse or partner from the start. This will help you hone in on the expense categories you both think are important to break out. Especially, if you’ve decided you are going to be tracking expenses month to month. 
2. Once you have the general categories, make sure you include ones that are important to just you or just your partner so it’s a true reflection of your goals and priorities. Try not to be too judgmental while you are trying to get all the different categories down in your budget.  If this is the first time you are creating a budget there could be some emotions tied to this process that you didn’t know were lurking below the surface. My husband had to have a bike budget which involved him buying a new bike every 3 years. We divided up a new bike into 36 “monthly” chucks and put that in the initial budget to keep the conversation going. 
3. Don’t forget to include expenses that only happen once a year or a couple of times a year. Don’t be “surprised” by things you know are coming…anniversaries, birthdays, holidays, etc
4. Make the emergency fund part of the budget if you don’t have one already.
5. Plan to pay off your debt. Credit cards, student loans, car loans. Make sure they have a place in the budget each month. 
6. Leave some buffer in your budget for unexpected items. Remember you are likely using averages on a monthly basis so there could be some variability. 
7. Block some time with your spouse or partner to look at the budget each month together and adjust as needed. Make this a positive experience. Do it over a glass of wine and pizza and keep distractions to a minimum. 
8. Switch off who updates the budget so both partners are comfortable with the process month to month. 
9. Google Sheets can be a good free way to track your budget that both partners can have access to at all times.
10. Increase your savings rate as you pay off debt. Let compounding interest work it’s magic.
11. Don’t compare yourself to others as you work through the budgeting process. Everyone’s budget is unique. 
12. Give yourself some slack as you start this process. There will be some months where it’s difficult to stick to your budget. 
13. Track your spending for a few months to get a realistic idea of how much you spend in a category. Do this before you try to cut back anywhere.
14. If you are using your credit or debit card in the budget process scan thru each month for fraudulent charges and call your bank if you see anything suspicious.  Consider freezing your credit while you are at it.  
15. Budget some fun spending money even if it’s just a little bit. There will be so many negotiations on other items. It’s nice to know you have total control over some piece of the pie!
16. Plan for the life you want to live not how others expect you to live. 

The Bottom Line on Budgeting and Planning to Save Off the Top

We save off the top and don’t have a budget. However, we watch what we spend closely to ensure we are saving enough to reach financial independence so we can retire from our corporate 9 to 5 jobs. We automate our 401k and Health Saving Account (HSA) contributions right out of paychecks. Next, our brokerage account investments are saved mid-month along with savings for specific goals. Each goal gets its own savings account to track progress.

Then we track our spending month to month without much judgement (as best we can :)).  If we have a month with a lot of expenses we may adjust some the next month. But overall, we are still trying to determine what a good annual budget really looks like for us. We want to ensure we can do and see all we want when we retire to the next chapter of our lives. Plus, once you can see what you are spending year to year, it’s exciting to see the impact on your overall financial independence goals. Little changes in areas you don’t find value in can really add up.

What do you like to do with your budget and goals to save? Do you save right off the top of your budget? Are you still tracking expenses to figure out how much you spend annually? Did I forget any good budget tips? Leave me a message below.