Budgeting for Newbies
Most people would rather have a root canal than learn about budgeting. Of course, this is not what we’re about at Veterinary Financial Summit.
Why is budgeting important? We recently read about a veterinary couple who wasn’t budgeting. They started worrying when the amount of money in their bank account was less than their body temperature.
That sent them into a “spending freeze.” The same scenario repeated itself, month after month. Once they started budgeting, their lives changed. Instead of their money controlling them, they became in control of their money.
Choosing a budgeting plan can improve your quality of life, peace of mind, and retirement plan. Yet it truly does not have to be complicated.
We’ve researched budgeting options that busy vets can implement. We found 3 powerful yet simple solutions. It doesn’t matter which one you choose. They are all good. What matters is to actually choose one you like, and stick to it. It could change your life!
The 50-30-20 Solution
This concept is based on separating your (after-tax) income into 3 broad categories: needs (50%), wants (30%), and savings (20%). Simple, right?
* What are needs? They include everything you need to live, including food and shelter (housing, utilities), transportation, insurance (health, disability, life, home, car), child care and other necessities.
* What are wants? They improve your quality of life but are not essential to survive, including a gym membership, entertainment, vacations, gifts and beauty products. Yep, these are considered luxuries.
A simple way to tell the difference between a need and a want is to ask yourself whether you can delay spending money on something without severe repercussions, such as ending up in jail, losing your home or paying a penalty. If you cannot delay the expense (alimony, credit card bill, car payment), then the item is a need. However, if you can put off the purchase (designer clothes, vacation, cellphone upgrade), then the product or service is a want.
Still confused? Here are 3 examples:
- Eating is a need. Buying cage free eggs, Fair Trade coffee and organic raspberries are wants.
- A car may be considered a need. Driving a Tesla is a want.
- Wearing pants is a need. Wearing $400 designer jeans is a want.
And this certainly doesn’t mean living like a pauper. Remember, in this system, 50% of your take-home money goes toward needs.
* The final category, savings, represents the remaining 20% of your net income. You could simply split this money into two equal amounts: 10% for short-term savings or an emergency fund, and 10% for retirement investing.
The 70-30 Rule
This incredibly simple system was inspired by author and motivational speaker Jim Rohn, who recommends living on 70% of your income and saving 30%.
* 70% includes everything you need or want — lodging, food and clothing, small pleasures and even luxuries.
* What about the remaining 30%? Jim Rohn suggests an even three-way split between donating, saving and investing.
The 60% Solution
We believe the 60% solution is one of the best systems available for managing your money.
Financial expert Richard Jenkins, the creator of this concept, advises allocating 60% of your net income to “committed expenses”: groceries, clothing, insurance, debt repayment, donations and recurring charges. Then you can divide the remaining 40% equally among 4 categories:
- Short-term savings: this is for non-critical expenses that might or will happen in the near future: birthday presents, vacations, repairs and maintenance.
- Long-term savings: these will help fund CE, a special vacation or a down payment on a car or a house.
- Retirement savings: these go toward your retirement plan at work and other long-term investments.
- Fun money: this shouldn’t be hard to put to good use: use it for movies, concerts, kite surfing, weekend trips, etc.
Of course, you can fund these 4 categories unevenly. Keep in mind that if you do that, you will likely spend more on fun and less on investing. That might sound like a good idea in the moment, but it will hurt your ability to retire comfortably.
The reason we like these 3 budgeting concepts, is that they give you multiple options based on your spending habits and goals. The categories are pretty broad, so you don’t have to monitor every penny you spend every day (which is what most people hate about budgeting). But it is a good idea to reevaluate your spending on a regular basis to assess whether it matches the percentage breakdowns from the system you chose.
If your percentages are radically different, then you’ve just proven to yourself that your lifestyle doesn’t match your paycheck, and you need to make adjustments.
Ultimately, what matters is that you don’t spend to a point that prevents you from paying your bills and still manage to save and invest. Living in the moment is a lovely concept, but planning will help you ensure you can buy a home, become a practice owner (if you wish), pay your student debt or retire one day.
If you follow this advice, you won’t have to worry about overspending in a given category. Remember: each system provides a pretty generous amount for fun, experiences and much-earned vacations.
At Veterinary Financial Summit, we are not about saving every penny and telling you that you can never buy a latte. We are about finding a happy balance between work and fun.
Phil Zeltzman, DVM, DACVS
Meredith Jones, DVM
Co-Founders of Veterinary Financial Summit