Money

How I Budget and Save – A High Level Overview

I’ve received a few requests asking about how I manage the budget in our household, and approach our savings goals. In the spirit of full disclosure of the obvious, I am definitely not a financial expert. My savings philosophy is far from scientific, and stems from a combination of how I was raised, and that one time I calculated what we would need to retire and was scared out of my wits. Here’s a high level view of how we budget and save in our household. I’m going to start from a high level view of our gross paycheck, and go from there.

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The first cut: retirement savings 

Both my husband and I work, so we have a gross figure that is paid out approximately twice a month. From these paychecks, the first contribution goes towards our individual 401k accounts, calculated towards an amount that maxes it out to the federal limit per year ($17,500). These deductions are split between a traditional 401K (pre-tax) and a Roth 401k (post-tax). By the way – if your employer matches some of your 401k contribution, you should know that it does not count towards your individual $17,500 maximum. If this is the case for you, you can be saving even more for retirement! I found this out a few years ago and adjusted our numbers accordingly.

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The second cut: long term savings 

After our 401ks, the second deduction from our paychecks goes into savings. We save 50% of our take home pay, after retirement contributions. Here I will caveat that we are saving for a house, and that I count our “home savings account” as long term savings. Our overall savings each month are allocated largely between this “home account,” which is kept in cash, and a separate, truly long term savings account which is kept largely in individual equities.

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The third cut: short term savings

This third step I take is one that I don’ t think is necessary for everybody, but that I do find helpful for our household. Of the remaining net income after our long term savings have been accounted for, I typically stash 20% of that amount (or 10% of the net income pie) into a separate short term savings account. This isn’t a traditional emergency fund account (we have a separate one for that which holds about 6 months of expenses). Rather, this short term savings fund is used to help cover items such as big travel expenditures, expensive furniture purchases, property taxes, etc. It ensures that we don’t have to dip into any of our long term savings accounts to unusually large bills. We probably dip into this account several times a year.

The remaining 40% of our net income covers day to day expenditures – things like eating, shopping, mortgage payment, gas, etc etc.

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All right! This more or less covers from a high level, how I approach budget and savings goals in our household. Of course, what I covered is largely from a consistent monthly income (paycheck) perspective. Like many, we also will have areas of income which we handle differently – things like bonuses we tend to save 80-90% of in various accounts, dividends are reinvested on a basis, and it goes on. This process has worked for us, and takes little time to maintain once established. The trick has been figuring out the ideal percentages for us in light of our goals, and I expect them to change as circumstances evolve.

I hope this was helpful for some of you! I would love to hear how you manage budgeting and savings in your households and if you have any tips/tricks/different ways of viewing your own individual savings goals. It’s always enlightening to hear about how others approach personal finance, and I always learn as well!

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  • hera
    September 9, 2013 at 4:05 am

    Wow that’s a really good break down with detailed allocations. That’s what happened when I worked for paychecks. Nowadays my DH and I have a few businesses and it is hard to allocate like how you did.

    With businesses that require reinvestment and also monthly return plus other unforeseen income, it is a little bit trickier.

    The beauty of your break down I found is a short-term saving and your other emergency fund account.
    Thanks for sharing!

    • Katherine
      September 10, 2013 at 7:19 am

      Hi my friend, would love to hear more details about how you and the Mr. approach things!

      • hera
        September 10, 2013 at 2:36 pm

        Em we are still trying to figure out how to manage the funds like you guys do – ideally like a formula like the one you have.

        Right now – we have accounts that we don’t move at all, like a saving account. All of our returns on investment go in there and we don’t move that. Whatever money that goes into that account, it will be reinvested when it reaches a certain amount.

        Then there is another bonus account which we allocate “bonus” from our business, a bonus that we give to ourselves, and all bonus would go into our investment fund as well. All DH bonus with go into the bonus account for investment. (You can tell we are quite aggressive in term of investment). Basically, the investment return account and the bonus account are both toward another investment.

        I can’t exactly calculate the percentage which we make investment, it is not formulated.

        Other than investment and 401k like your first cut, we don’t really have anything formulated. It is just the uncertainty of business. But our emergency fund is also from our investment/bonus pool since that money is not locked up and can be withdraw right away.

        Things seem to be more or less the same after baby. We allocated fund for baby already before he was born, and I think schooling would be a completely different world if we decided to put him in private school. Otherwise, spending is completely not limited. Like I told you earlier, DH and I have separate accounts and we don’t interrogate each other’s spending as long as our business finance is healthy.

        One thing that I rely heavily on is that, I don’t stretch my budget when I make purchases. If I think I can’t afford something, I will just not buy it. Things are always available for purchase if I have the money. If the question “can I afford it” comes up, I will not go for it until I am ready. I found it helpful.

        Thanks for always taking the time to write up these beautiful articles and interviews. Although I don’t always left comments, I enjoy reading them very much!

        • Katherine
          September 10, 2013 at 5:08 pm

          Hi Hera, thanks for providing such a detailed response! I love how responsible you and DH are and how you have your own systems and methods. I also admire how independent you are 🙂 Thanks for the kind comments!

  • Elaine
    September 9, 2013 at 5:17 am

    I enjoy reading this a lot, I love personal finance related topic. It’s helpful that you pointed out that the $17,500 limit does not include employer matching, I didn’t find out until 2 years ago!

    We used to save over 50% of our take home pay, however, it seems impossible now with kid 🙁 Oh well…

    I’m wondering how “long” do you think your investment in “home account” will stay until you actually buy another house? Just wondering why you’re keeping it in cash as you already have the 6-month emergency fund set aside in cash. Why not invest in low risk equity/ bond investment? Seems little return is better than no return? Would love to hear your thought!

    • Katherine
      September 10, 2013 at 7:20 am

      I’ve heard the same thing about kids…! 🙂

      You make a good point and some of it is risk but mostly just laziness. I didn’t go into this detail in my post but we do have a certain amount of our “house fund” set aside in stocks but going forward I’ve just been keeping any additional in cash…the returns currently are so low that we haven’t bothered though you are right that we are leaving money on the table there.

  • Tabitha
    September 9, 2013 at 5:24 am

    This is excellent K, thank you, we are both haphazard arty types, I wish someone had sat me down and taught me this sort of thing was I was 21.

  • Adele
    September 9, 2013 at 6:31 am

    GReat top line view Katherine!
    Have a wonderful week xoxo
    http://www.intotheblonde.com/

  • guest
    September 9, 2013 at 10:23 am

    This is such an awesome post. I love following your blog everyday because it is so well-rounded- you cover fashion, beauty, interviews, travel, career, and smart financial budgeting/savings as well. This is a very good savings plan that you have in place!

    • Katherine
      September 10, 2013 at 7:18 am

      Thank you so much!

  • Jessica
    September 9, 2013 at 12:05 pm

    Thanks for a great post. I would also like to point out that for people lucky enough to have an employer match in your 401k plan, they should be sure to contribute enough to the 401k plan to receive the maximum employer match. Don’t leave “free money” on the table. On an unrelated note, I was wondering if you saw the article in the NYTimes yesterday on Harvard Law School (I think you went there) and the steps the school has been taking to encourage women (students and profs) succeed. I’d love to hear your views on the article. Sounds like HBS is a tough place.

    • Katherine
      September 9, 2013 at 9:06 pm

      Yes I read it at the airport…it brought up a lot of nostalgia and good and bad memories alike. HBS is both a wonderful and tough place for women at the same time, I have a lot of thoughts on this but none are coherent enough to print right now 🙂 Thanks for bringing up the point about maximizing the employer match!

  • Susan
    September 10, 2013 at 2:50 am

    Thanks for this post, Katherine 🙂 as someone who knows very little about personal finance and savings, this post was much appreciated. I really admire how much you and your husband save and live within your means, especially in this consumer culture. I read recently that the majority of Americans have no emergency savings fund

    What do you suggest for those who are still paying off debt (student loans and credit cards)? How does one wisely build savings while trying to rigorously pay off debt?
    And do you have tips on investing, for finance newbies such as myself? Or any suggestions for books or resources I can turn to?

    Thank you!

  • JJ
    September 10, 2013 at 9:52 am

    Thanks so much for those wonderful tips!

  • Marlene @ chocolatecookiesandcandies
    September 10, 2013 at 2:22 pm

    We used to do exactly this until my daughter came along. That all went out the window. We’re only starting to slowly increase our savings and investments now that she’s older but having kids do drain finances very quickly. I only wish childcare costs aren’t so ridiculously crazy in NZ and the UK. I only wish we were more aggressive with our investments in our 20s and early 30s but we got lazy.

    • Katherine
      September 10, 2013 at 2:25 pm

      Has childcare been the most significant cost in your opinion that comes with having kids? We keep getting warned and I know that even with all the warnings we’ll probably still be surprised!

  • KC
    September 11, 2013 at 8:42 am

    Great post! This is my favorite blog to read.

    I agree with all the above posters regarding having a child and all associated costs. We used to be able to aggressively save but it is very near impossible with a child. I’ve found the greatest costs to be for child care/tuition. It is essentially a second mortgage cost-wise.

    • Katherine
      September 11, 2013 at 9:19 am

      Hi KC thank you for your kind comment and also for your insights on savings goals after having children! Do you think that it gets multiplied in a linear fashion with more children – having 2 kids multiplies the cost by 2x, etc?

  • Chic 'n Cheap Living
    September 11, 2013 at 9:01 am

    It’s great to see this laid out Katherine. My husband and I have similar savings plans. We max out our 401k contributions for the year. Otherwise, we divide our savings up among equities, bonds, and savings. We don’t have as precise a breakdown as yours and of course spending for some months is higher (like these past few months with trips to Europe and tax payments in two countries). But we try to save as much as we can, but still have little splurges for ourselves and a few big trips a year.
    It is immensely helpful to use Moneywiz for our spending in non-US currencies and Mint for US spending. It is so much easier to see spending and trends!

    xoxo,
    Chic ‘n Cheap Living

    • Katherine
      September 11, 2013 at 9:20 am

      I’m a Mint addict as well, though sometimes I find myself spending more time than I’d like fixing categories, etc!

  • Ava Lon
    September 11, 2013 at 12:03 pm

    Hi there!
    Long time no see! Hope your trip to Africa was splendid! My good friend, also, just returned from a long safari there. 🙂 Thank you for sharing all your travels — it’s through you I travel and go on ‘vacation’ since I am always too busy to and have too many people relying on me to leave. But that’s okay 🙂

    This was a great post! I think it is so helpful to explain this to so many women (and men) who are interested in saving and also spending, since it does seem that many of your readers tend to spend quite a bit when they do spend, but I do think they do so wisely.

    While I agree that things will always be around to buy, I am also part of that party that also thinks that when an opportunity arises where you can purchase something (anything, a piece of jewelry you have been coveting for years, a time piece, a painting, etc.) be it through a sample sale, a lucky connection that allows you the ’employee discount’ and thus enabling you to purchase it at a great discount.

    For me personally, in the past, a serendipitous relationship with an upper level associate (at a store we mutually admire) led me to purchasing a time piece I would never consider paying full retail price for. I was at that time working part time at a place she admired, and it just happened to work out for our mutual benefit. To this day, it’s one of my favorite time pieces. 🙂 That said, even with the discount there was a long time afterwards that I kept thinking, “I really shouldn’t have purchased it, but I LOVE it so much!” It took me time to recoup the loss in funds (a long time) but to this day, I do not regret it at all given the price hikes since.

    I am not sure if any of that made any sense, but hopefully it did? 🙂

    Great posts, as always!

    Ava

    • Katherine
      September 11, 2013 at 4:40 pm

      Thanks Ava for sharing your philosophy! That watch does sound like a very special opportunity and I definitely understand. Thanks also for the Hermes heads up, I hope some readers can benefit!

  • Ava Lon
    September 11, 2013 at 12:04 pm

    Oh, and before I forget, if you happen to be in NYC next week, there will be an Hermes Sample Sale open to the public starting on Sept. 18-21, 9am-5pm, expect insane lines.
    Location: Soiffer Haskin.

  • Yogirl
    September 13, 2013 at 12:58 pm

    Katherine, what I especially like about your blog is that you cover also these ‘serious’ topics like savings and taxes. Lots of my female single friends don’t care for pensions savings etc. and laugh at me because I save a large amount of my salary for retirement.
    Please go on like this!

    • Katherine
      September 13, 2013 at 3:50 pm

      Thanks so much for the kind words Yogirl!

  • Revanche
    September 19, 2013 at 4:48 pm

    I love that you save something like 65% of your income – as a PF nerd, I am hugely impressed by this. And inspires me to do better. We’re only saving something like 30-35% and we take it off the top like you do before spending.

    I wish there was a better, more automatic money management tool for everyday use, though. Yodlee was a long time favorite, then I tried Mint, but it just seemed like I was spending too much time on the manual stuff.

    • Katherine
      September 19, 2013 at 4:54 pm

      Thank you so much! We try our best but sometimes of course you feel bad that you’re not trying enough. I think probably everyone feels that way. It’s also important to enjoy life and reward yourself. You have worked so hard and are so responsible, my only concern for you is that you wouldn’t be rewarding yourself enough vs saving enough!

      You are right that Mint takes forever! I still use it though, nothing better yet (though I think there’s room for that in the market!)

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