The objective here is to provide some helpful observations on a few important business and personal planning topics: How to develop and maintain a smart spending plan, why is saving so important, and how to implement a savings plan that really works.
The sad reality is that many couples just never figure out the money side of their life. They spend their days and energy working and stressing over seemingly hopeless money problems — problems they compound everyday with stupid decisions. Money is a culprit in their marriage, the bad guy; money controls everything. Their excuse is that they just don’t have enough. They really believe that all would be well and blessed with return if they just have more. To them, it is purely a game of how much.
In fact, money is really more of a how-to game. Of course, the amount of money you have matters, but how the two of you work together in managing, handling, and taking control of what do two have ultimately will be far more important in determining the quality of the money part of your marriage. Many couples with mediocre, often modest incomes do it right. They’re in control. Money strengthens their marriage. They touch all the bases. They sleep well at night. They have capital that gross 24/7, 365, every minute of every day.
Money is a positive force in their lives. It is a means to many happy things. Many other couples, some with big incomes by almost any standard, that money knock them down. They are out control and they know it. Their individual expectations are skewed. Money is a burden, a huge negative that often sparks quarrels, finger-pointing and communication breakdowns. The concept of working together to really get ahead and accomplished dreams has been lost. It’s completely off the chart. The bar has been dropped so low that the only acknowledged challenge is to minimize the financial bleeding and personal conflicts each month.
To help illustrate the topics we’re going to discuss, we are going to focus on the challenges of Dave and Linda, both 28. Dave is a graphic artist employed by a web design company. Linda is an interior decorator with her own business that is starting to grow and develop its own following.
Every couple needs a spending plan. This plan is the key to your financial success and will be now and in the future. It should be a dynamic plan that adjusts as your circumstances change. If you spend too much, you’re always going to have problems. The key is to set a smart spending limit and stick to it. Financial control requires that you spend less than you earn, a lot less. It’s pretty simple. If you spend too much you’re always going to have problems.
So how much is too much? Here’s the answer.
If as a couple, you earn less than $130,000 a year, and you’re not self-employed; that is, you don’t run your own business. Set your maximum spending limits at 66 percent of your total gross income. That 66 percent has to do the job. It is your limit. It must cover all your needs, desires, wishes, you name it. And it’s a maximum. If you can do it for less, go for it. And if you were self-employed, that is, you run your own show and are not paid as an employee of another, reduce your maximum spending limit to 61 percent. This reduction is essential to cover the increased self-employment taxes you will have to pay.
What if you earn more than $130,000 as a couple? Well then odds are you will need to pay higher taxes and your spending limit will need to be reduced usually to around 60 percent. The obvious question is what happens to the other 34 percent or 39 percent if you’re self employed? Where does it go? This is your phantom share, the portion that you cannot spend.
For starters, assume that if your family gross income does not exceed $130,000, an amount equal to 20 to 23 percent of your gross income will be used to cover income and payroll taxes. The exact amount of these taxes will depend upon your income level and various other factors. But for most, about 60 percent of phantom bottom share is eaten up by taxes.
But what about the balance of the phantom share? There should still be between 11 and 14 percent of your income left over. And if you do things right, there will be. This portion of your phantom share is the most important money you have. It is the key to your financial success.
Here’s what you do with it. Put an amount equal to 3 percent of your income into a savings program that you can get at at anytime with no hassle, expense or penalty. This is your contingency fund, your rainy day fund, or your I-screwed-up-I-need-some-money fund. It will be used to cover those money surprises and painful hits that you didn’t see coming. A car breaks down. You both need to attend a funeral eight states away. One of you gets sick and loses a week’s pay.
Every couple needs a contingency fund. If you don’t spend it all in one year, consider yourself lucky, carry the fund forward to the next year, and keep funding it. Don’t spend it until it’s needed. If you are like nearly every other couple, you’re going to need it sooner or later.
Now that leaves roughly 8 to 11 percent of your combined income intact and maybe a little more depending on your savings program. This is your most important money because it is money you get to keep for the two of you. Think about it. All your other money is going to others. Landlords, stores, creditors, governments, it’s out and gone. But this money you get to keep. It is the key to your freedom, independence, and control.
Of course, there will be no emergency in savings fund if the spending is messed up. Let’s illustrate a smart spending plan with Dave and Linda’s situation. Dave earns $66,000 a year in his position. Linda anticipates that she will net about $54,000 from her decorating business. So, their combine annual income is roughly $120,000 or $10,000 month. Dave and Linda set their maximum spending limit at 66% – that’s $6600 a month. They estimate their annual federal tax hit for income and payroll taxes will be about $26,400 or $2200 a month. Their state has no income tax. They set aside $300 a month (3% of their total income for an emergency savings fund) and $900 a month (that’s 9% of their gross income), each month into an investment program.
The remainder, $6600 or 66% of their combined gross income, is their maximum monthly spending limit. Dave and Linda have a spending plan that keeps them in control. They know where their money is going and where it is gone. The plan is complete but simple. Most of all, it is designed so that each of them can easily monitor their performance against the plan at all times.
Let’s look at the specifics. You will recall that their spending limit each month was $6600. Dave and Linda wisely break their planned expenditures into five basic categories, each of which they could separately control.
The first category is called “monthlies.” This is the easiest category to control because checks are written once a month for or direct bank draws are authorized once a month for the repeatable items in this category. Examples include rent or mortgage payments, utility expenses, insurance premiums, car payments and loan payments.
Their second spending category is called “big hits.” These are large expenditures that come around once or twice a year. If these items are not anticipated and planned for, they can break a budget in the month in which they hit. Dave and Linda estimate their big hitches for the year, list them on a spreadsheet, and then set up an automatic draw each month from their checking account to their savings account for an amount equal to 1/12 of the annual total.
For them, the big items that fall into this category are their annual car license fees and taxes, holiday time expenditures, and vacation expenses. When a big hit arrives, they transfer the needed amount back into their checking account. Nothing could be easier.
So much for the easy categories. The next three categories are the ones that usually cause all the problems.
Linda and Dave call their third category “staples.” These are the things they routinely buy to sustain themselves — food, gas, personal care products, all the necessary stuff. They start by working together to calculate the total amount they will need each week for their staples. They factor in all the components that make up their staples but they don’t bother with the hassle of trying to track each component separately. They use a weekly figure for control purposes because it’s tied to a short time frame that they can easily monitor. They have a structure, a mechanical way to keep track of their staple budget each week. They use their bank debit cards from their joint account for all their staple purchases. These cards make it fast and easy at the gas pump, in the stores where they regularly buy their staples.
Then they use the credit column of their check book to keep track of their staple money. It’s a running side fund in the check book. Every Monday, they increase the fund balance by their weekly staple budget. Every time they record a debit charge for a staple in their checkbook, they put an “s” by the charge and reduce the side fund by the amount of the charge. So the check book for their joint account in addition to keeping a running balance of their account total also keeps a running balance of their weekly staple budget. If at any time they go negative in their staple budget, they spot the situation immediately and take corrective action. It’s a simple mechanical way to stay in control.