How to decide what you can afford

If you are in your twenties, you are probably making some big life choices. When you move, switch jobs, go to school, get married, have kids…you have to readjust your budget.

No big deal- you already know how to do that! But what if you are about to make a big commitment (signing a lease, buying a car) and you aren’t sure if you can afford it?

Let’s rewind in my life, exactly 13 months ago. I was moving to a new (expensive) city. I had a new income. I had sold my car but I wasn’t sure how much I would be spending on public transportation or cabs (because how was I supposed to know, I hadn’t been there yet!) How much would food be? (turned out my closest grocery by about a half hour was Whole Foods…it’s not called Whole Paycheck for nothing, kids!) Word on the street was that everything is pricier in this city, and I no longer had the luxury of a car to drive to farther, cheaper stores.

When I was house hunting, there was a huge range of rent prices in the areas I could reasonably commute from. Places that looked like dumps to me were $700 (with roommates), while nice one bedrooms were about $1900 (although there seems to be no cap on the maximum amount you can spend on an apartment). But what could I afford? I didn’t want to sign a lease and then have trouble paying rent, but I also had more income coming in than I had in the past and I felt like I could move a step or two up from double wide trailer I lived in when I was 24.

The first thing I did was estimate my take home pay. I knew what my total salary was, but it is always a surprise when you see the amount on your first paystub (oh Uncle Sam, you get me every time). If you forget to calculate in taxes, you can be really up a creek. I used this calculator, and then I subtracted $200 just to be safe.

Then (I really did this because I had no idea) I googled how much of your paycheck should be going to rent. This is an example of a wisely written article that helped guide my choices. The standard response is that you should be paying no more than 30% of your take home income in rent. Sounded good to me, and I could move a step or two up from the dump apartments! Yes!

Spending 30% of my income on rent meant that I ended up in a lovely house with two roommates. Definitely not a dump, but not a luxury one bedroom apartment in the middle of all the action, either. It suited my commuting needs, I was in a safe neighborhood, and I made friends with my roommates. I never had trouble paying the rent.

Even though it turned out that many parts of my new city were more expensive than I had planned, I knew that my fixed costs (rent) were within my budget. Because I am pretty savvy about reducing my variable costs if I must (food, transportation- even utilities) I am mainly concerned with making sure I can afford my fixed costs.

However, some people swear by the 50/20/30 rule for budget planning.

50% of your budget should go to housing, food, utilities and transportation.

20% of your budget should go to your financial goals (savings, emergency fund, retirement).

30% of your budget should go to lifestyle (clothes, gym fees, bars, vacations).

I personally don’t follow the 50/20/30 rule, but it can be a good rule of thumb when you are trying to decide what you can afford when you are going through big life changes. Again, these rules (all budget rules) are just guidelines for yourself. The entire point is to make things easier for you, so that you never have to struggle to pay rent that you can’t afford.

It’s kind of like the Game of Life, except it’s actually real life. And you actually have to live in the house you pick!

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New Year’s Resolution Reminder!

Today is the (self imposed, entirely made up) deadline for setting up a budget tracking system! This doesn’t mean you have to decide on your whole budget today, this means you are taking the next few months to track where your money goes. Once you have a good idea about how much you spend each month in each category, then it will be a breeze to set up some budget guidelines for yourself.

There are a few ways you can do this. You can set up an account with Mint (my personal favorite. It takes a while to set up, but after that it is basically zero maintenance and they all of your long term tracking for you).

You can make your own spreadsheet (minimal effort to set up, the amount of maintenance depends on how detailed you want to get).

You can even experiment with the cash-only system just by using your best guess and seeing how the money works out. Don’t forget to write down your adjustments so that you can figure out what your trends are.

Pick a tracking system that is easy for you. This is the first step to setting up a budget, and the budget is for you and you alone (or I guess, for you and your partner if you have joint finances). So make it a system that works for you! If setting up a Mint account makes you want to vom, then try another system. Baby steps, I promise it will be worth it in the end!

Eating on a Budget: Lentils Edition

One of my favorite foods is lentils.

I used to hate lentils. That is because (sorry Mom!) the only way I had ever had lentils was in this thick, baby poop textured soup. We ate a lot of it one sad winter when my grandpa was sick and for years I associated lentils with bland, undersalted gloopy sadness.

But not anymore. Because lentils don’t have to be brown! Baby poop days are over, baby! You can buy green lentils, yellow lentils, orange lentils, black lentils (called beluga lentils because they look like caviar, and if that isn’t fancy I don’t know what is!). During one of my leanest Christmases I made beautiful (very inexpensive) gifts for my family by making lentil soup mixes in jars with multiple colors of lentils with some spices added.

Lentils are about $1.89 per pound and a pound of lentils will last about 10 meals. That is an EXCELLENT bargain food (did I mention filling, comforting and healthy, too?). Even if you splurge on olive oil or spices, you are still getting some cheap eats.

Here are two of my favorite lentil recipes:

This first one is a very happy lentil dish (I just read an article that said that orange foods are for happiness and now I feel happy when I eat orange foods. I also read a different article that said vitamin C makes you happy, so that is probably the link we were missing. But I prefer to think it is the color that brings the joy). Warm curry, coconut milk, a squeeze of lime (added by me, I told you I am bad at recipe sharing)…perfect for freezing winter weather and for helping you imagine that you are eating it out of a banana leaf in the tropics. When I made it I ended up with a huge pot (all legumes expand and you will eat more of them than you expected, that is a life lesson) but we gobbled it up happily for a full week! I never can tolerate leftovers that long and usually end up freezing them, but these lentils were just what we needed.

The next one is a Rachael Ray speciality. Feel how you want about Rachael Ray, but I learned about this recipe when she told a very engaging story about how she had these lentils as an appetizer at a restaurant and could not get enough of them. I serve them on nice crusty toast and I add extra garlic. Yum. I might have skipped my entree too, Rachael. The garlicky olive oil might be the best invention of all time, and combined with lentils…swoon worthy.

I hope you enjoy slenderizing your budget (and possibly your waistline) with my newly rediscovered favorite legume!

Even Lower Maintenance Budget Planning

My friend Marisa said some lovely things about my blog the other day. This is what she emailed me:

Kate- I LOVE your blog. I forwarded it to my sister and my mom and told them to join. You are saving my financial life right now (and Willow too since she sent me her budget spreadsheet), and you’re doing it in a way that makes it funny, easy, and I dont get anxiety about it!

Thank you, Marisa! I really hope that this blog is helping my readers get over any financial-planning anxiety they have. The goal is to make you feel awesome about how you manage your money, instead of guilty and/or anxious and/or head-in-the-sand about finances.

I couldn’t help but notice what Marisa included in the parenthesis, though. Willow’s budget spreadsheet? Willow is our mutual friend (also the best roommate I have ever had) and Willow is an extremely practical person who will put infinite extra effort into things she cares about, but does not like spending time on things she doesn’t give a crap about.

You know what Willow doesn’t give a crap about? Money. But she lives in reality and not in the poorhouse, so she has to do some financial planning just like the rest of us. But she and Marisa don’t want to spend hours on Mint. While I (obviously) love Mint because of its automatic tracking, graphing capabilities and goal-setting, some of my readers might find Mint overwhelming (it is kind of a bear to sign up for Mint) and some of my readers just might not be interested. That’s ok, but it doesn’t excuse you from sticking to a budget.

Here is Willow’s (and Marisa’s, now) budgeting method:

  1. Willow made a spreadsheet on googledocs that she can access from anywhere because it lives online. She is the only one with access to it so the world can’t see her financial information (although even if they could it’s still pretty safe because she isn’t including bank account numbers in there).
  2. For the first three months, Willow compared her estimated spending with her credit card/ checking account spending to make sure the numbers line up and adjusted them when they weren’t working.
  3. She uses her credit card for all of her purchases so that all of her spending is in one place and she can easily compile categories. (And she gets rewards. She just cashed in her rewards for $100. Nice.)
  4. This is not that much work for her because she is not a big shopper (so for example, she only goes to the grocery once a week, so that is four trips a month, just four numbers to add).
  5. She pays off her credit card in full each month.
  6. If she spent too much in one category one month, (her words: “like if I spend too much on socks one month”) she cools it the next month on that category.
  7. It’s a general estimate. She doesn’t give a crap about tracking each penny.
  8. She has an automatic transfer into savings so she doesn’t have to worry about saving money. Ditto into retirement.
  9. She has a “free money” category. This is for miscellaneous purchases, and anything left over in the “free money” category gets transferred into savings at the end of the month.
  10. She has emergency savings, savings for trips and big purchases. She knows when she will be spending a lot of money that is not normal for her budget, and she can plan accordingly to make sure she has enough to cover it.

Want to see how her budget works? I have recreated a template with example amounts for you all to use. Please use it, but I have made it so you have to copy and paste it make your own version in googledocs or Excel so that everyone can use it without overwriting their own personal information.

Hope this method helps you!

Relationships and Money, Couple 1: Juan y Catalina

Subjects:

Juan (37) and Catalina (29)

Juan has two children from a previous marriage and makes twice what Catalina makes.

Juan pays child support and alimony directly from his paycheck. After that, Juan and Catalina put all of their money into a joint checking account. From that account, they pay their bills, save for mid-term goals and they save for retirement. They have a  budget that they have planned out together. They are aggressive savers and they are both on the same page about their long term goals of early retirement.

To deal with buying things they each want but don’t want to have to discuss, Juan and Catalina give themselves equal “allowances” each month from the joint checking account to their own private checking accounts. The amount is enough for both Juan and Catalina to feel like they can take care of their personal purchases. If Juan wants to buy one of these for every day of the week, he totally can without even talking to Catalina about it. But Catalina might pretend she doesn’t know him anymore. Such is life, Juan.

This system seems to work for them because:

  1. Juan and Catalina have agreed upon long term savings goals and both spend their money according to their shared goals. Neither of them have run out to buy a new road bike or a pair of Jimmy Choos just because they felt like it. They are committed to their goals and follow the rules they have made for themselves.
  2. Juan and Catalina have mutually decided on their “allowance” amount, and they both agree it is sufficient for their personal needs. Neither of them are forced to buy work clothes at Goodwill to stick to their allowance (although they can if they want).
  3. Juan and Catalina never have to have arguments over whether they spend too much on clothes, or haircuts, or stupid crap*
  4. Juan and Catalina pay their bills before they pay themselves their allowance. If they stray from their budget on a joint purchase or want to go on a joint vacation- they just lower their allowance and they are still on track for their savings targets.
  5. Mainly, Juan and Catalina are an example of a successful financial couple because they have taken the time to figure out a system that works for them. They have agreed on goals, budgets, and how to deal with personal purchases- but they had to sit down and have discussions about it before they could get to la felicidad financiera (financial happiness, it sounds nicer in Spanish, eh?)

* Is it worrisome that I actually own one of the items on this list of stupid crap? Maybe. But I also happen to think item #10 (baby mop outfit) and item #1 (send poop anonymously in the mail) are brilliant ideas.

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