An alternative approach to a detailed monthly budget:The Balanced Money Formula is based on your net income (your income after taxes). Warren and Tyagi say that, ideally, no more than 50% of your paycheck should be spent on Needs (and keeping them below 35% is best). Of the remaining amount, at least 20% should be devoted to Saving, while up to 30% can be spent on Wants. That’s it. Simple. Three categories. No detail. This is the sort of Big Picture budget that I find useful, and in this case I could see that there was something wrong with my Wants. Here’s how the authors define these terms:
- Needs are things you must pay no matter what: housing, food, utilities, transportation costs, insurance.
- Wants are everything else: cable television, restaurant meals, concert tickets, comic books, clothing beyond the basics, etc.
- As in the list of tips I shared a few days ago, Saving comes last in this plan. Everything left after you take care of Wants and Needs is set aside for the future. (If you have consumer debt, that’s also tackled here
Read the whole thing for some phenomenal financial advice.
I really like this approach and it mirrors my own financial approach before coming back to school for my PhD. My financial plan consisted primarily of first setting aside a percentage of my income for giving and saving (split between my 401k and a money market account), living below my means, and then feeling free to spend whatever was left over. I came up with this strategy after reading
The Richest Man In Babylon (highly recommended) and it was both simple and effective.
While working as an engineer, I kept my housing costs down by renting rooms, having roommates, and eventually living in relatively modest 1-bedroom apartments.
I never bought a house in part because it would have consumed too large a portion of my income for me to feel comfortable with. (My calculus on this would probably have changed if I had a wife and kids.) When I was thinking of coming back to school, one of my friends encouraging me to do so, told me the transition would be easy since I "already lived like a grad student." In retrospect, he was right and having lived below my means definitely made the transition much easier.
Some of the benefits I've gotten from pursuing this strategy include:
Paying off debt. When I first started this strategy, I had credit card debt that I had to pay off from a long-distance relationship I had been involved in. The relationship didn't last, but those bills sure did. Fortunately with some discipline, my debt was manageable and I learned some valuable lessons on how to better handle my money through all of this.- Retirement savings. Early in my career, I was able to invest heavily into my company's 401k. Prior to the recent financial crisis, I had a sizable sum saved up. I haven't looked at my balance in a few months and don't plan to look at it again until sometime next year. Ideally, I won't have to touch it for at least another 30 years. If the current financial mess isn't over by then, I will probably have bigger things to worry about.
- Travel. By living below my means, I was able to fulfill my goal of hitting all 7 continents on my first passport (without checking a bag, I might add). I did so without going into debt. One way I was able to squeeze so much travel in was by staying at youth hostels rather than hotels on my journeys. It kept costs down, allowed me to meet a ton of wonderful people, and discover a lot of local things to see and do I would have never otherwise known about.
- Part-Time School. I got my MBA in a part-time program while working as a project engineer. While I would have loved to have gone into a full-time MBA program, I gained a lot of valuable work experience during those 2-1/2 years, earned a good income, saved money to do more traveling, avoided student loans, and got my company to pay for ~ 75% of my degree (keeping me free from student loans). Not a bad deal at all.
- Full-Time School. While preparing for my MBA program, I started reading up on economics and absolutely fell in love with the economic way of thinking. A couple years after completing my MBA (and after finishing my travel goals), I decided to come back to school for a PhD in Economics. A couple years later, I also enrolled in GMU's JD/PhD program in law and economics. Between the money I was able to save before starting, academic fellowships, and summer jobs, I've avoided having to take out any student loans so far. I'm now in my fourth year of the PhD program and second year of law school. I still may have to take out a student loan before I'm done, but intend to keep it as small as possible. If I can start making some headway on my dissertation, there's a chance I might get out in another year-and-a-half, finishing both programs in a total of five years.
A few budget adjustments I've had to make since coming back to school:
No international travel. This has probably been the most difficult adjustment for me. Prior to coming back to school, I typically traveled to at least one new country (usually two or three) per year. On my current budget, there's no way I could do this without borrowing money to go. I've shifted to domestic travel instead, including a number of road trips and was able to make it to my 50th state a couple years ago. The adventures continue, they're just on a tighter budget than they used to be.- Roommates. I had my own 1-bedroom apartment my last few years in Orlando and do miss having my own place. The DC area has a very high cost of living and I've had to start living with roommates again to keep my rent at a manageable level. Thankfully, I haven't had any major issues with any of them. I have had to make do with much smaller spaces than what I've had in the past (my current room is ~ 130 square feet), but I've learned to make maximizing my space a fun challenge. Living in a small space has also given me the opportunity to afford living in the in the best location I ever have. (One block from the subway and walking distance to school and just about anything else I could possibly need.)
- Resident advisor. I was a resident advisor during the first year of my PhD program, which allowed me to live rent-free for a year. This was a difficult time for me academically and in retrospect it probably wasn't the smartest move for me -- especially since it had been many years since I'd seen technical academic work. (I couldn't believe how much math I had forgotten since engineering school.) Still, while it added a ton of stress and meant I didn't have as much time to study as I wanted/needed, I was able to pull out of a rocky start in my PhD program and start doing well my second year. It also meant I hardly tapped into my savings during my first year.
- My truck. My poor truck has definitely seen better days. I have now owned it for a decade after buying it used. It has been bashed in, broken into, vandalized twice, and the mechanism to roll down the driver side window recently broke. Still, it gets me from point A to point B without giving me any mechanical problems. It old enough, I don't want to put too much money into it. Particularly since moving to Arlington, I now only drive once every couple weeks or so. I hope my truck will make it until I graduate. If not, I'll use ZipCars (which I can pick up across the street from where I live) and rental cars (Enterprise is a five-block walk from here) until after I graduate.
Having said all of this, I can't claim to live an overly Spartan life. I still eat out quite regularly, spend a lot of time with friends, travel a decent amount domestically, live in possibly the best location I ever have, continue to build my library, and even manage to buy gadgets from time to time.
Rather than focusing on maximizing wealth or minimizing expenses, I'd encourage others to live below their means, keep debt to a minimum, save a little each month, and within these constraints to use their money to enjoy their lives and accomplish the goals they have in life.
I'm currently over at Georgetown's Law School after having just finished two rounds of an ABA Negotiation Competition. I must say this is one of the most thoroughly enjoyable experiences I've yet had in law school. The final session of competitors are currently negotiating and judges will announce the four teams that advance to the final round (tomorrow) during a reception later tonight. This experience has reminded me how much I enjoyed (and miss) much of the contract and business negotiation I did while working for Westinghouse and Mitsubishi. (I particularly enjoyed my involvement in cross-cultural negotiations with the Japanese.)
