My third rule of budgeting: Budget for Savings!

by Nick on July 31, 2010

My third rule of budgeting is, after you’ve committed to writing down your budget and set your budget for less than you take home, budget to intentionally save more.  For me, it’s important to save both intentionally and unintentionally.  Why?  Because it’s all about discipline and changing behavior for me.  It’s a good way of controlling your spending if you stick with your written budget.  And – with auto save and intentional additional savings – it’s a great way to supercharge an early retirement plan!  For example, if you take home $3,000.00 per month, set your budget amount for $2,700.00 per month to “auto save” 10% of your take home (or whatever amount works for you).  Then put $2,700.00 at the top of your budget and work your way down.  Set a separate savings goal – figure out what you want to save for (emergencies, vacation, down payment, early retirement, etc.) – and calculate how much you need to save to get there.  Then put that in as a separate line item that you stick to.  And call it what it is – i.e. the “No More Meetings Fund” or the “Tahiti Fund.”  Remind yourself what it is and why you’re saving.

Then spend the rest (or even less, if you can…).  Put your rent, utilities, food and any other items down that you need (or want).  Budget for each of those.  And plan for the “this-month items” too (i.e. birthdays, holidays, celebrations, etc.).  Write it all down before the month to give.  Budget an amount to spend (or give) for the “this-month items” and stick with it.

Here are a few savings categories that I budget for:

  1. 529 plan;
  2. Emergency fund;
  3. Vacations;
  4. Investing;
  5. Retirement; and
  6. Student loan early repayment.

This has worked out great for my family.  It seems like a lot of savings, but some of the amounts aren’t huge.  For example, I’ve been doing this for a while so I have an emergency fund I’m comfortable with in place and that amount is very small.  I reevaluate my spending and emergency fund from time to time to make sure I still have enough too.  It changes with the times, but I like to have a one-year emergency fund.  Once I save it I don’t reduce it, but generally I set my emergency fund based on my perceived ability to replace my income (or at least the amount I spend each month) if I were to lose my job.  These days that could be a while.  We’ll talk more about my thoughts on emergency funds later.

That’s about it for rule three – so start saving intentionally and unintentionally!

And until next time – slowly put the credit card down and step away from the mall!

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