Creating a budget can seem like an insurmountable task, but today Amy Walls of Thimbleberry Financial introduces us to a basic concept that can get you started: The 50-30-20 rule. 50% of your budget goes to necessities, 30% goes to wants, and 20% goes to savings.
Naturally, the first step is to categorize your needs vs your wants. Needs include housing, transportation, and utilities. Wants are more discretionary, like entertainment, hobbies, and dining out. But it is important to know that a want can become a need. For example, a vacation home may be a want, but after you buy it, the monthly bills become a need.
Saving 20% of your income can make a major difference in your financial future. This can be done through retirement plans, emergency savings, and more.
Finally, we talk about how to overcome some common challenges faced by busy professionals when they try to create a budget.
For more information contact Amy Walls and her staff at 503-610-6510 or click here Thimbleberry Financial.
Jag: Welcome back to ThimbleberryU. I am John Jag joined as always, with Amy Walls of Thimbleberry Financial. Amy, good to be with you as always.
Amy Walls: Jag, it's great to talk with you. I'm excited about today's topic too.
Jag: This is right in your wheelhouse. We are talking about the 50-30-20 budgeting rule. I know that our target audience, especially folks you work with at Thimbleberry busy tech healthcare professionals, they struggle with time management in their personal lives. This is the real easy way to do things, right?
Amy: It is. Here's the thing, as a financial advisor, we don't actually get into budgeting with our clients. Now we have our clients identify where they spend money. You don't know how to change a behavior if you need to change it if you don't know what you're actually doing. Budgeting is something we get into, but we do want budgeting to be simple because our clients are busy. Who has time to budget to the penny? I think this concept really helps break it down.
Jag: All right, we'll start at the basics, Amy. What is the 50-30-20 budgeting rule?
Amy: Of your income coming in, it's the idea that 50% goes to necessities, 30% goes to wants and 20% get saved. Now, these aren't going to be the perfect numbers for everybody, but they're putting us in the ballpark.
Jag: Good starting point.
Amy: When we're working with our clients we're figuring out how much they need to be saving. That number may shift and then the 50% and 30% may need to shift. It gives us an idea of looking at everything we do. One, is this a need or a want and what do we need to do for our longer-term financial future and goals?
Jag: When you say need versus want, that can be different for different people, for sure.
Amy: Absolutely.
Jag: All right. As I mentioned Amy, as we talked about in the podcast before, you work with a lot of tech and healthcare professionals. How does this budgeting rule help them?
Amy: When you're busy focusing on your career, focusing on your family, your hobby, the last thing I think these folks probably want to do, especially because they do have enough money coming in is have to worry about where each penny goes. It's just not fun. It doesn't feel productive. Because it's getting into the minutiae when maybe a 10,000-foot view could be better or could be just as helpful rather than better. The 50-30-20 rule allows for that higher level view and a larger bucket categorizing to know am I proportionately correct.
What it's really doing there is it's prioritizing time savings and money savings to say, "Yes, I am in the ballpark." This passes a smell test if you will. When we do that, it can alleviate some stress or anxiety. Stress being things that come from the outside. Anxiety being things that stress us from the inside. For any individual, it can potentially alleviate some of that concern to be able to say, "I can let go. I can breathe. I can maybe go play and do the things that I want to do and use my energy towards its best purpose. Rather than digging into the budget."
Jag: There we go. Let's start with the 50. Talk about the necessities.
Amy: Necessities, they're needs. They're housing, they're transportation, utilities, they're also taxes. That is one that people often overlook in this category because they think, "Hey, taxes are coming out of my paychecks. I'm good."No, taxes fit into this category.
Jag: Just to be clear, Amy, what you're saying is I need to pay my taxes.
Amy: You need to pay your taxes. Also if you owe taxes at the end of the year, setting money aside for this paying quarterly taxes, et cetera, that's part of this needs bucket.
Jag: Got it.
Amy: Something I do want to address here is that in this area we're talking about needs, but let's say at some point you bought a second home. Ultimately that house is not a need, but paying for it is a necessity. At that point or getting rid of it would become the other decision. When we look at needs and wants necessities or wants, that second home could fall into the necessities category versus the wants category. I think that's going to depend per person and their situation. If that makes sense. Once you've made a long-term financial commitment, it can still be a want absolutely.
It may categorically be more of a necessity.
Jag: Got it.
Amy: If one of our listeners goes through this exercise and looks at, they're spending at rough numbers and says, "Gosh, my needs are 60% or 70% of my spending. No wonder I'm not having so much fun because my wants are much smaller than this 30%." What can they do? That is a good time to make some tough decisions. Maybe if you've got a second home in your necessities, it might be time to consider is that what you want to be spending on or is that what's making your wants number so small.
Then there's the choice of do you use that second home or do you find yourself going on lots of other trips that drive those numbers up. Sometimes we've got this idea that, "Hey, if I get a second home, that's where I'm going to vacation all the time, but then I want some variety, so I'm still taking trips and doing these other things." You may be spending essentially the same money twice and that may not be serving you both in terms of happiness, but also your financial goals. It might be carpooling if parking is several hundred dollars a month to park in a downtown area.
Maybe you carpool people to save a little bit of money.
Jag: I know for example, since COVID, my wife and I have both been working from home since March of 2020 and it's not changing. We downsized to one car. It's very rare that we would both need the car the same day. When that happens, we coordinate and we work it out. You talked about some things going from a want to a need. The car went from a need to want because we didn't need the second car. The car payment and the insurance we're good with just one.
Amy: My husband and I periodically have this conversation, but with two kids at different ages running in different directions, we haven't been able to-
Jag: That's fair.
Amy: -coordinate that one yet. I'm in full agreement with what you said. There's also some things that you can do in this area for your necessities to help cost savings tips. If you're fine, you're over meal prepping and looking at bills maybe for things that are necessities like groceries, but that can go over. You give yourself a weekly or a monthly budget. Close they are a necessity. [laughs] Portland does have the naked bike ride. That's one time you people don't have to.
Giving yourself a weekly or a monthly budget maybe into a separate spending account for those types of things can be helpful to help keep you on track because the numbers can vary. I can go to the grocery store and I can buy filet mignon or I can buy ground turkey. laughs] Then one thing, because we do work so much with our tech and healthcare clients, there is something related to our tech clients or anybody working in tech that applies to these necessities and that is equity compensation. It tends to come in, in spurts. Maybe it's once a year, maybe it's quarterly.
That equity comp is income. It can be dangerous to have it become part of your lifestyle and your overall income. Let's say that equity compensation accounts for $100,000 of your income in a year. You say 50% of that is going to go to necessities, but next year your stock price is really low, or you change employers and you have a year with no equity compensation coming in. It can be very dangerous to look at that equity compensation as regular income to be allocated to regular expenses in a 50% way.
Jag: You could make the same argument for somebody who works in sales and is counting on their commission as part of their income.
Amy: Absolutely. One way to maybe think about those dollars is maybe you have a home project that really since we're talking necessity needs to be done. You'd really like for it to be done. It's more than just a want, but it's a one-time project. Maybe those funds go to cover the cost of that project. That would be a good example of using them so that it's a one-and-done versus as we talked about the ongoing expenses for a second home.
Jag: That helps the necessary cost. Amy, what about the fun stuff? Let's get to the wants. Those are way more fun to talk about.
Amy: Absolutely. The wants are definitely the fun stuff. I've recently been reading a book on play and figuring out how to incorporate more play and the benefits of play. Wants aren't all play, but that's where I go with them. There's some very big, studies showing the benefits of experience for long-term happiness versus things. With the wants, and we're talking about play too, many of our clients work really hard and they play really hard. We talked about necessities, the wants, it's about balance.
It's about having both the things we need and the things that make our lives nicer and happier. There are ways to manage discretionary expenses, which is what these wants are. Things like dining out and entertainment and hobbies. Earlier I talked about a weekly or a monthly budget. These can actually be combined. For example, one spending account that on a weekly basis you send money over to for both some of your necessities, like I said, groceries, but can fluctuate in terms of cost, but also your dining and entertainment and hobbies.
My husband and I do that. Every week, we send a certain amount of money to what we call our spending account and manage against that. Other things to do for wants to help keep costs in control because they can escalate. Be that if you find yourself skiing regularly, for example. If you really get into it, buy the season pass. If the math works. You can easily wait and say, "Oh, gosh, until I go so many times, this may not make sense. I haven't proven to myself I'm going to do that." If you're a person that starts something and doesn't continue, that makes sense.
If buying a season pass is going to pay off after three or four times of going, then buying the season pass may be your best avenue and you'll learn in the next year, did you go or not.
Jag: You can adjust accordingly for the following year.
Amy: You could absolutely. Using credit cards and using points from those credit cards to travel. That's one alternative now. Many of my clients listening are probably going to say, "Wait a minute, we've had a different conversation. The reason that we've had a different conversation on these wants is that using a credit card to pay many of your expenses can allow for justified spending. Meaning I'm going to get points, therefore, I'm saving this much by spending this, and so I should do it, and it causes increased spending."
Jag: Yes, the credit card thing is really interesting because I think about as long as it's stuff that you would be spending money on anyway, and as long as you can pay the full balance every month so you're not paying interest, because if you start paying interest, you're going to wipe out any benefit whatsoever. We've got the hack going right now. In February, we're going to take my best friend and his wife and our goddaughter to Disney World in February.
Amy: Awesome.
Jag: We're going to take care of the flight and the tickets and everything. My wife opened up an airline credit card, spent X amount within X amount of time, and you're going to get a bajillion points. It's not exactly a bajillion, it's a little bit less than that, but you get the idea.
Amy: Can you define bajillion? As a financial advisor, I'd like to know.
Jag: No, I cannot. [laughs]
Amy: Fair enough.
Jag: I don't know. It's a lot of points. It's enough points that it's probably going to cover two or three of their airfare. How's that?
Amy: Perfect.
Jag: We're going to put our regular bills, the money we would already be spending on that credit card until we hit the spending threshold. Get the points. Once the points are going into the account, she's going to close the credit card.
Amy: There you go. You're being disciplined about it, and you're not using it to justify spending. I'm trying to find another word to justify. Justify spending money you wouldn't have otherwise spent.
Jag: No, you're exactly right. Because on the flip side of it, I upgraded one of my credit cards to get more travel benefits because I travel a lot. It was like the same thing. Spend X amount by this date to get all these benefits. A couple of times I'm getting a targeted ad on social media, "Oh, that looks like a nice shirt." Or, "Oh, I'm going to go get tickets today," because I can get toward that limit on my credit card. At the end of that month, I went back and went, "Oh, my gosh, I spent way beyond my budget this month."
It's because I was spending on stuff I wouldn't have bought anyway. I'm glad you made that differentiation. It's really important.
Amy: The psychological impact of that advertising is tricky.
Jag: Yes.
Amy: I talked about play and the study showing that experiences are really valuable. One of the things I'd say, too, here is think about experience versus things. For example, maybe you're looking to buy your wife a birthday present. It may be better, you have to make the decision, not me, to forego something physical in an effort to have that experience. Here's the reason why. Especially if it's something for yourself. I don't remember the source on this, the statistics I've heard several times. Within three days of buying something-- so of making a purchase, we no longer get happiness out of that purchase.
Jag: Wow.
Amy: If we have an experience, let's say a trip, our body will kick off endorphins. Whenever we think about that trip for the remainder of our lives.
Jag: Wow. Let me go back to my goddaughter. Last Christmas, there was a present that she really, really wanted. It was the hot toy. I don't remember top of my head what it was. My buddy could not find it in any store. We were able to find it and ship it to her. She got the toy that she really wanted for Christmas, and she was over the moon. Something tells me, this Christmas, when she opens up the package and sees we're taking her to Disney World in February, I'm guessing the memories-- I'm hoping at least, the memories of Disney World are going to be better than the toy that she got the previous year.
Amy: Absolutely. Studies say that would be the case. Yes, what a great trip. I hope you're like boxing the trip within another box, within another box so that she has many things to open in order to build up the anticipation and get to this Disney World trip.
Jag: My wife is the resident Disney expert, so I think there's some customizable gift we can mail her, she lives out of state, that she could then say, "Guess what? In X amount of days, we'll see you at the Magic Kingdom, so there we go." Let's talk about the 20% going to savings before we wrap up, Amy. How can we make that easier?
Amy: The first thing that comes to mind is setting up as much of it up to be automatic as possible. Setting reminders in your calendar. Setting it up to be automatically, what I really mean by that is take advantage of your 401(k) for example. Now, for the clients we work with in tech and health care, it's a low percentage of income that allows them to maximum fund their 401(k). When we say try to save 20%, they may be maximum funding that at 10% of income. Where does the other 10% come from? It depends on where it's going, but as much as possible, if it can be set up automatically, great.
Maybe it's send that money into a separate savings account. Maybe it's setting reminders in your calendar for right after equity compensation vests. If your company vests in February and May and August and November, then maybe at the end of each of those months, you set a reminder to look at your proceeds from whatever you did sell and set that into a separate savings account to get transferred into your investments so that it's a real quick eyeball of, "Cool these are my proceeds. Here's 20% of that. Boom. I don't have to wonder anymore. I don't have to go back and pull the documents."
Jag: Way more effective than just dumping it and buying a sports car.
Amy: Yes. That would fall into the wants category.
Jag: [chuckles] Okay, so look, budgeting is hard. Budgeting can be a challenge, Amy. What are some ways we can overcome some of the common challenges people have when it comes to budgeting?
Amy: I think one, accept that no one likes it. [laughter] Even your financial advisor probably doesn't love doing it. It takes away from other things in your life. Acknowledge there might be a good enough box you can check on this. Figure out what's most important to you. Knowing that your time is best used doing X, Y, and Z, your energy is refilled doing A, B, and C helps give that permission to not be as detailed, but set times to review what you're doing. It's not so much the budgeting piece that is the time-consuming part. It's the tracking what you've been doing against your budget.
Jag: Okay.
Amy: All right? Setting the budget with the 50-30-20 is a ballpark. Now it's actually breaking down your spending and saying, okay, approximately how much are we spending in these areas? There are some quick ways to do that, such as downloading all of your expenses for the last couple of months into an excel document. If you set a calendar reminder to just do this every three months and then sort them by the gobbledygook thing on the statement that says where it's from or your bank account, sort by that, your grocery store is going to show up at the same spot.
Then you can quickly figure out a ballpark of what you've been spending. If you do that, say every three months, you're going to have history after a period of time to know if your expenses are shifting drastically.
Jag: Especially as we all use cash so much less these days. It's much easier to track. There's an electronic record now of everything that you swipe or tap with your phone or whatever.
Amy: Absolutely. Also, get professional help. Depending on your situation, some of the things we've talked about today may not make sense for you. Somebody who knows the ins and outs of how you think about money will have ideas on ways to make-- having your money go to the right spot be easier for you and still be on track for long-term goals.
Jag: It's that mindset that we've talked about in so many episodes of this podcast. You must have some success stories that could inspire our listeners when we're talking about this stuff, right?
Amy: I do. One of the stories that first comes to mind ties to setting up a weekly or monthly budget. I know somebody that did that, and within a few months of setting up a weekly transfer for their spending had found they were saving so much doing that, that they actually paid for their travel budget for the year-
Jag: Oh, wow.
Amy: -and were so excited about that cost savings and what else they could do with that money. What that resulted in was peace of mind, and permission to have that fun they wanted to have. I think that's the ultimate success story, is people going out and living the lives they want without the stress, and still being on track for their goals.
Jag: I can't wait to play this episode of the podcast when it releases for my wife, because usually on Saturday mornings we'll sit down and she'll say, "You want to look at money for the month?" "No, I don't, but I know we should." We look at it and put our heads together and figure everything out. Advice is certainly well taken as always, Amy. If one of our listeners wants to talk to you about any of this stuff or anything related to their financial future, what are the best ways to find you?
Amy: They can give us a call at 503-610-6510, or go online at thimbleberryfinancial.com.
Jag: Good stuff as always, Amy. We'll talk in a couple weeks.
Amy: Sounds great, Jag. Look forward to it.
Jag: Registered Representative, Securities offered through Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Investment advisor representative Cambridge Investment Research Advisors, Inc., a registered investment advisor. Cambridge and Thimbleberry Financial are not affiliated.