Small fragment of a notes dump from my library sprint the other day on personal finances.
Now, I'm an easily distracted person who knows she falls into the trap of making lofty goals and complicated plans and not sticking to them, so I'm making this ridiculously simple. Four categories: expenses, Next Big Thing, retirement, and giving.
Expenses. This is the big one of day-to-day living, and (after many attempts at perfectionism) I'm coming to realize that neurotic budgeting ("I will spend $5 on milk this month!") is not for me, and I work best with a "as long as I don't run out of money, I'm okay" method. This would be an awful idea if I didn't have all my other categories siphoned off my paychecks first; since I'm already scooting things into retirement, Next Big Thing, and giving accounts, I'm basically making myself a sub-budget which I don't have to budget within. Basically, it's my usual "set up walls so I can thrash around within them" methodology as applied to finances.
Expenses are starting out at about 55% of my after-tax paycheck (I'm giving myself a lot of elbow room as I start out, but hope to cut this down to 40% or less eventually). Yes, I'm trying to live cheaply. (Mm, bag lunches.) There are three main kinds of expenses.
- Fixed expenses like rent and health insurance. I know how often I will have to pay them and how much they are going to cost; it's easy to plan for these.
- Variable but definite expenses like groceries and utilities. I know I have to pay them, but I don't know how much they'll cost. I have a maximum number for these that I'm pretty sure I won't exceed so I know how much I will have at minimum for Fun Money (indeed, whatever I don't spend on this at the end of the month goes into Fun Money).
- Fun Money - whatever I want. Piano lessons, dinner out with friends, a concert, a camping trip, new sneakers... whatever I don't spend on the first two, I'm allowed to spend here. Things like "grr, I broke a dish and need to buy a new one" detract from Fun Money. Of course, if I don't spend all my Fun Money I get to roll it over into...
Next Big Thing. This is something I've done for over a decade, and I love it. It's the portion of my savings (right now, about 5%) that is explicitly not for retirement. I've used this to do things like buy my first computer (age 15), travel the world (age 21), and furnish apartment / buy musical instruments (age 22). Basically, large purchases, fun trips, that kind of thing; it's like my little luxury fund. It's also why I sometimes look like I'm a big spender for short periods of time; I'm dumping the cash I'd saved up for insert-expensive-thing-here over the months or years.
Retirement: Because It's Just A Good Idea (TM). I'm starting with saving/investing 30% of what I make, but trying to move that percentage up (taking it from the Expenses category) as soon as possible. Again, this is allocated amongst various things (right now, this basically means "yay, Roth IRA"), but they all get funded from the same portion-of-my-paycheck stream.
Giving Back. Important, but something I haven't formalized 'till now. I'm starting off at 10%, which seems to be the standard tithe. Some people give this money straight-up to charities, some people keep it in a fund to appreciate in value so they can donate a lot of money later on in life (rather than a little bit now). I volunteer a lot and mostly plan on giving to the projects that I work with, keeping the funding very close to what I do for them, sort of the "I'll do this for you and I'll pay for the expenses" method.
Total and taxes: Expenses 55%, Next Big Thing 5%, Retirement 30%, Giving Back 10%. Add them all up and you get everything. I'm setting my tax withholdings so that the government will owe me money rather than the other way around each tax season, so everything I get is mine to keep (and when I get a tax refund, guess what? Retirement or Next Big Thing!) Yeah, I know I won't be able to earn interest on the money when they withhold it, but hopefully my guesstimate will be good enough that I'll withhold as little as possible above what taxes I'll actually owe, and the difference won't be so bad. Better than scrabbling to come up with the money every tax season.
Things that might change: The percentage allocations will shift as time goes by and I learn how much I need to happily live (I hope it's less than I'm allotting now). At some point, Next Big Thing might split into Next Big Thing - Whatever and Next Big Thing - Down Payment On Some Kind Of Domicile. I'll cross that bridge when I come to it, at least a year from now, because I sure can't think about it now.
The most important thing is that this is all automatic; I'm setting things up so that stuff gets automagically direct-deposited into the appropriate accounts for all these categories, so all I ever see is the "ooh, this is for expenses" stuff that I've decided I can spend anyway. Mmm, online banking and direct deposit.
Next up: files.