Breaking Down Our Budgets: How We Nail Retirement Savings, While Still Going To Soulcycle + Sushi
You asked + we’re answering!! Today, we’re delivering the exact formula that we use for budgeting + all of the tips that help us to stay on track. The term “budget” tends to elicit fear + anxiety for many, but, for us, we think budgets are so exciting because they allow you to take control of your money + design the life that you want to live. A budget should be empowering, not intimidating.
Ever since we launched Hello HENRYs, we’ve always stressed the importance of the big ideas over the small details. There is no point in spending all of your efforts cutting out Starbucks or tapping into your neighbor’s wifi, if you’re vastly overpaying on rent, missing credit card payments or parking your life savings in a low interest, big-name bank account. By all means, cut out Starbucks if it’s not something that brings you value or happiness, but don’t think of it as your path to financial freedom if you aren’t making sure that you have the bigger, more impactful things covered.
For the breakdown below, we use our post-tax income + what’s left over after our employer-matched, retirement contributions. If you do nothing else for your financial future, PLEASE, PLEASE ensure that you are taking full advantage of your company’s 401(k) match. If your employer matches up to 4%, you should be taking full advantage of this + contribute 4% also. After hitting, the 4% match though, click HERE for our advice on where to invest for your retirement next. Without further ado, let’s break down our budget + help you to create yours. Pour a glass of wine, grab a notebook + get ready to take the reins on your spending.
The 50/30/20 Method
Budgets that get too specific down to each line item almost never work in the long term. Why? Most people’s lives are constantly changing. One month may be full of friends’ birthday parties or a big vacation. While another may have you feeling more “Netflix + chill.” Getting too specific with a budget often leaves people feeling unmotivated or disappointed if they go over the spending cap that they set for themselves on a category + they abandon the budget entirely. On the other hand, not being specific enough can be even worse. We have quite a few friends who have their entire paycheck deposited into one account + they spend aimlessly from this pool of money until their next payday. Generally, when people adopt this method, the boring things like saving or investing become an after thought or allocated for the last remaining $20 at the end of the month.
The 50/30/20 method allows us to be broadly specific. It sets guardrails for the big picture areas of our lives, but allows us to spend freely based on what we have going on in a given month. We have our paycheck automatically split into 3 different checking accounts - 50%, 30% and 20% in each. If you’re opening new checking accounts to be able to follow this method, be sure you’re taking advantage of any sign-up offers + that you’re selecting no-fee accounts. I have 50% deposited into a Chase checking account, 30% deposited into my BECU checking account + the remaining 20% deposited into a Bank of America account.
The 50 - Essentials
No more than 50% of your income should be allocated to your necessary expenses. Necessary expenses include things like rent/mortgage, utilities + groceries NOT Netflix, cable, or Happy Hour. Many experts suggest that no more than 25-30% of your income should go toward housing. We prefer to have a broader 50% + give ourselves the freedom to spend on the things that we value most. For example, you may live in a super expensive city like San Francisco or New York + need to spend more than 30% of your income on housing, but be able to save by using public transportation + not paying for a car. My 50% breaks down accordingly:
25% - Housing - Mortgage, HOA, Property Taxes, Insurance, etc. (I split these expenses with my fiance proportionally based on our incomes. For more tips on how to budget with your S.O., click HERE.)
10% - Groceries
7% - Water, Electricity, Internet, Cell Phone Bill, Utilities, etc.
5% - Transportation - I don’t have a car + my employer sponsors my bus pass to get to + from work, but I still reserve 5% of my paycheck for transportation. I like to be able to chip in for gas if I road trip with a friend or if my fiance has expenses, like tab renewal or new tires, come up on his car.
3% - Miscellaneous - There are always miscellaneous expenses that come up that would fall into “necessary expenses,” such as a prescription or if you have a friend staying with you + your grocery bill runs a little higher. I like to keep a “slush fund” of a little extra money to be able to comfortably cover any small expenses that come up.
I use my Chase Sapphire card for every expense within this category + pay the balance off in full each month. If you’re thinking about signing up for this card (we’re obsessed!), use my referral code HERE for even more bonus points.
The 30 - Lifestyle
No more than 30% of your income should be allocated to your lifestyle or “the fun things.” The exception here would be if you are able to drastically cut your essential expenses to less than 50% + want to adjust your lifestyle accordingly to more than 30%. For example, maybe you choose to live in a house with friends to save money on rent, so that you have more money to play with for Happy Hour, vacations or workout classes. You can be flexible here. The firm rule is that your essentials not be MORE than 50% of your income, but if they are consistently less, feel free to move the left over % into your lifestyle spending + adjust your direct deposit accordingly.
When you calculate it out, 30% of your income is a lot of money at face value. What’s important here is to make sure that you are spending it on things that really + truly matter to you and bring you happiness. Otherwise, it’s easy to feel that the money disappears quickly + that you never have the freedom to do everything that you want. My top priorities for my 30% are:
Fitness - I am extremely diligent with my workouts + schedule them like appointments that I don’t miss. It’s an area of my life that brings me happiness + balance and, as such, I would prioritize this over anything else when it comes to my discretionary income. I have a monthly Orange Theory membership + Classpass membership. I workout always 4, sometimes 5, days a week, so these are expenses that are pretty low in terms of a “cost per use.”
Travel - For the last couple of years, I have had a trip every month, sometimes just a small trip over to Chelan or Portland, sometimes a bigger international trip. The exact amount needed for travel fluctuates, but I am pretty much always booking a flight, paying for accommodations, etc. I generally allocate 10% of my monthly income - a third of my 30% fun money - to travel.
Shopping - It sounds silly, but, hey, the 30% is a judgement free zone! I work in fashion/retail + it is important for me to look the part and feel good about myself. In this industry, it’s easy to feel “out of style” very fast + I like to allocate about 5% of my income to be able to update my wardrobe with a few new pieces every month. This is, of course, an area that is easy + flexible to scale back on if other obligations arise.
I use my Delta American Express card for all expenses within this category + pay the balance in full each month. Delta is running a special on this card through mid-September. If you’re thinking about signing up, use my referral link HERE for extra points. Bonus - the Delta card is the only airline card out there that lets you earn elite status from spending alone. All other airline cards require a minimum number of flights and/or miles flown each year to qualify.
Within the 30%, you will never be able to do EVERYTHING that you want. You need to challenge yourself to identify your top priorities, as I have, and spend without guilt on those categories, but cut back on the things that are of lesser importance to you. For example, I used to spend a ton of money going out to dinner or going out to bars on the weekends, but was then never be able to buy new clothes or go on all of the trips that I wanted + this made me really unhappy. I have since made some big adjustments. I rarely go to dinner with friends, unless it’s a birthday or special occasion. I still, obviously, value spending time with my amazing friends + family, but I will generally suggest a Happy Hour + appetizer instead of a full dinner.
Also, just a PSA here, to be respectful of how your friends choose to spend their money! :) If you’re a foodie + love to spend a few hundred dollars on a fancy dinner, by all means, go for it! It’s not something that I would prioritize, but that doesn’t mean that you shouldn’t. You might think me spending the same few hundred dollars on clothes is just as frivolous.
In the same vein, I ALWAYS hear people say things like “So and so said she couldn’t afford to go to the Taylor Swift concert with me, but I just saw that she booked a flight to Vegas. It doesn’t make sense.” On the contrary, I think it makes perfect sense. Your friend can’t afford to attend the concert with you because she chose to spend her money on something that she prioritized to a greater degree - the Vegas trip. If your friend isn’t suggesting any other alternatives to spend time together, such as a walk or a wine night in, then that would be a cause for concern, but, if she still wants to spend time with you + spends her money on other things, be happy for her!
The 20 - Future
Contrary to how 50% is the absolute MAX that you should be spending on your essentials/necessary expenses, 20% is the absolute MIN that you should be spending on your future. This 20% should be allocated to anything that takes care of future you. It’s important that you automate this + have this be a proactive, forward decision rather than an after thought at the end of the month. A few ideas for allocating the 20%:
An emergency fund - 3-6 months worth of expenses, $1000 at an absolute minimum. We keep ours in a high yield, online savings account. More information on why this is a must can be found HERE.
IRA contributions - We get into why you should have both a 401(k) and an IRA HERE.
Investment accounts - We share a few of our favorites HERE.
Student Loan Payments - Because student loans are generally low-interest + for the most part, help to increase your future earning potential and career opportunities, we consider them to be a “good debt” (as opposed to a car payment) + support you using part of your 20% towards these payments!
The 20% is what, we feel, is usually the most life-changing for people. It provides an amazing sense of comfort + security which helps to make the spending in other areas of your life guilt free. We also find it to build a ton of momentum + purpose that helps to keep your financial priorities in view. This is, typically, the area that we spend the most time on during our one-on-one consultations as it’s the most obscure + there is more confusion around which areas to focus on first. We’d say, for the average 20-something, that this 20% is spread to a few different priorities + that’s perfectly okay!
There you have it - our budgeting method broken down! This is a tried and true method that we have consistently used for years. it’s not for everyone, but it’s what truly works for us! If you want to get more specific with your own budget, we would love to help you through our one-on-one consultations.