(this post was written in July of 2015, so any reference to current events may seem odd, and wages/prices have changed, minimum wage has gone to $15 an hour in many places around the U.S.)
I was reading a post the other morning on Free Money Finance, and the author was talking about their pastor proposing a biblically based budget of Give 10%, Save 10% and live on 80% of your income.
One of the most interesting comments was "What about the poor? Your church must not have any poor people. They'd find it difficult to give 10%"
My thought, "Define poor." Are we talking about senior citizens living on a fixed income? At our church, they're probably our most consistent givers. Are we talking about broke college students? My daughter, when she was working part time going to college, gave 10% of her income to the church.
Defining "poor" is somewhat like defining "rich" - a tricky subject if the recent experiences of our presidential candidates are any indication. For every person in a given set of financial circumstances who believes they are too poor to give or save, there are others in nearly identical situations who are able to save and give generously.
I suppose someone who is a ward of the state, or has no income whatsoever, might have a tough time following this plan, but I don't think that's its intended audience, anyway. We have a mentally disadvantaged man named Tom who has attended our church for around 60 years, he has lived in an assisted living situation since his mother passed away about 25 years ago. Him, I would regard as unqualifiedly "poor", but I'm not sure he thinks of himself that way. He used to work at a fast food restaurant till they made him retire at 65, and I believe he used to put something in the collection plate when he had a little spending money of his own.
But I digress.
The 80/10/10 plan is a good, easy target for most people (let's just assume they're middle class, eh, and avoid any arguments about the poor) to try for in the first place. If you do something like this, you'll support charitable causes (church or secular), put some money away for a rainy day or retirement day, and probably not feel too pinched, financially, assuming you can keep the rest of your financial house in line. Could be a great starter budget. If you started doing something like this from the day you got your first job after high school or college, you'd probably have your retirement fully funded by the time you hit middle age, assuming the money was stashed in a 401K or IRA with an appropriate asset allocation (that's a whole different topic).
There may be some debate about who created the model I'm going to talk about - I first saw it in a financial article by Liz Pulliam Weston, who writes for MS Money online. It's called the 60% solution, and I think it's an even better model than the 80/10/10, but I'd call it a more "advanced" plan.
The 60% solution goes something like this:
60% - Committed expenses
10% - Retirement
10% - Long Term Savings
10% - Short Term Savings
10% - Fun Money
As you can readily see if you can read, there's no place in this budget for giving - on the surface. When I began to try to implement this in my life, I decided that the 60% Committed expenses would have to include my giving. This actually worked out well for my accounting purposes, as I've been "committed" to giving at least 10% to charity for quite a few years now. So, for the committed giver, this thing looks even harder to implement, on the surface, as now you have only 50% to spend on committed expenses, where a non-giver has that additional 10%.
When my daughter was about to graduate from college, I sat her down for an hour or two and showed her this model. I really need to sit down with her at some point and see how she's adjusted it to her lifestyle as a young married woman, just out of curiosity and to see someone else's perspective on how it all works.
Note: (2022) She and her husband have managed their money well and have both saved for the future and given some away to worthy causes. They should be just fine.
Again, I digress.
Let's talk implementation. I chose to implement this budget plan as applied to my gross income. I imagine one could do something with it on only take-home pay, especially if your retirement savings are not going into a 401K plan at work, and you have to shift them to an IRA yourself, but it seems easier to me to figure it on the gross, and to account for things that are withheld as being in either the committed category or one of the savings categories.
For example, withheld taxes are a committed expense. You must pay them out of every check, and if your income remains constant, so do they. They also tend to rise in direct proportions to most normal pay raises, so keeping them within the committed category through thick and thin keeps them as a pretty constant factor. I also put health insurance costs in as a committed expense. They're deducted from my wife's and my checks, so the amount is right there, easy to account for.
As far as retirement savings goes, here's the easy part. If you have a 401K, just sign up for a 10% contribution to the plan, and that part of the 60% solution is on autopilot from the start. Depending on when you start saving for retirement, you may need to adjust this upwards or downwards at some point - and you can move funds allocated for retirement to a Roth IRA or some vehicle which still allows you to save money, but gives you more options for when and why you're able to withdraw funds. Again, another topic.
The rest of the committed category includes everything that you have to pay on a regular basis, either monthly, quarterly, semi-annually, annually, etc. I've tracked my spending with MS Money for so long, I can predict this category pretty darned closely.
So, where are we? From our original 60%, we deduct 10% giving, and taxes. Depending on your tax bracket and how you've structured your witholdings, taxes are going to cut into that, as well. Let's just say that it's 15% of your gross. So, now we're down to 35% of your gross for fixed expenses. If you've followed the appropriate guidelines for obtaining a mortgage, your mortgage payment is no more than 28% of your income, so now we're down to 7% to live on. This includes utilities, groceries, gasoline, car payments, credit cards...all that stuff. Sounds pretty tough. Yep, it is tough.
It's probably something that's going to have to be implemented gradually, with the ultimate 60/10... proportions in mind.
Let's look at the final two categories, long term and short term savings. I'd say that long term is probably 2 to 5 years, as far as budgeting is concerned. The long term category for savings is for doing something like paying cash for your vehicles. Many PF gurus recommend that you always pay cash for a car that's about a year or two old (so someone else eats the depreciation) and drive it for 8 to 10 years.
Let's assuming you're basically starting from zero as a recent college grad, and you don't own a car yet. If we try to stick with the model as much as possible, but make an adjustment for acquiring a car, we could do the following.
Assume that your job pays $40K annually. If you follow the plan, you could save $4K a year in long term savings, and in 2 years you'd have slightly over $8K put away to buy a car - if you could defer that purchase and walk, bike or bus to work. In 5 years you'd have over 20K - with appropriate interest it'd be around $22K. This should buy you a pretty decent used car.
What if you went ahead and bought a car and financed it? Let's just assume that you bought something in the $8-10K range and financed the whole thing. Over 36 months, it's going to cost you $300 per month, limiting the amount of money you can put in short term savings to around $50 a month for that 36 months, then rising to $360 for the next two years. At the end of this time, you'll have approximately $10K saved up, so you can buy a new(er) car with cash this time, or keep driving the old one for another couple of years, when you'll have about double that.
That example assumes all other factors being equal. Inflation affecting the price of cars in just the same way as it affects your wages, and maintenance expenses, insurance, and licensing being the same no matter what car you bought. We all know this isn't totally real world, but you can see that it's going to be far better to save up to pay cash than to finance a car, assuming you can live without the latest, greatest status symbol.
Short term savings I think of as a more liquid, flexible thing, easily repurposed as situations change. You can save up for a dining room table, a new La-Z-Boy, a vacation, the kids' orthodontia down payment...whatever might be coming up in six months to a year. You can, if necessary and if you're funding both types of savings, shift a little money from one to the other, but you have to be aware of the consequences of taking money from one to feed the other, the type of delayed gratification implied. Move money from the short term to long term to get a new car more quickly, and you've now pushed out the time table for the new draperies.
(more later, perhaps)
