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.
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.
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.
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.
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!