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I love numbers. I love to break them down, work them out and come up with awesome uses from math. But I have a LOVE/HATE relationship with percentages. Sometime I find them very useful in laying out the data I’m looking at. But other times I find them deceptive, and don’t really trust what they are telling me. To quote the movie Anchorman, “60% of the time, it works, EVERYTIME.”
But when percentages are useful, they can help us see what we couldn’t see before and set goals to improve the percentage to get where we want to be. So today I want to look at the percentage of income you are using to live on, and come up with some ways to improve that percentage. Some of you might be encouraged, some might be depressed, but we can all take an honest look at where we are and move forward with a purpose once we expose that number.
What Percentage Of Take-Home Pay Are You Using To Live?
Since I can’t call any of you on the phone right now (it’s like 12:15am), I can only start by talking about the percentage of take-home pay we are using to live. And it might shock some of you. We are currently using 100% of our take-home pay to live. Yup. After tax, we are currently saving no extra money, and are living on all the income we make. I’ll be honest, sometimes it sucks. But for our current situation, it’s necessary.
As I’ve mentioned in the past, we barely make enough to get by, as one of the sacrifices we are making to allow Michelle to be at home with our kid (soon to be kids!). We would have it no other way, but it means that things are a bit tight at the iHB household. To keep from going insane, we do budget in a little spending cash, and are lucky enough to have figured out travel hacking, allow us to travel and vacation for free using credit card rewards. But other than that, things are pretty tame around here. Our budget has kept us in a good spot, and online and tax season income has allowed us to even make some strides in paying down our student loans.
I am maxing out my 401k match at the moment (6% pretax), as I don’t want to miss out on the company match (FREE MONEY!) and the long term growth opportunity of investing at an early age. But I would definitely like to change my percentage to something a bit lower. If I could even invest 5% into my Roth IRA, I would start building my retirement at a MUCH faster pace, and make my journey toward financial independence double in speed! But that money isn’t going to save itself, I need to set some goals!
So, what percentage are you using? Do you spend it all to live, or save a chunk every month? Are you saving so much pre-tax income that you don’t need to save any more?
Well….Set Some Goals!
Since it’s still really late and I still can’t call you to ask the above questions, let’s assume you’re saving some, but maybe not as much as you would have hoped. Maybe you save 8% of your take-home pay, but you know your household expenses are not 92% of your take-home pay! What are you going to do? Set some goals of course. And around here, we achieve goals by looking at the end and working our way backwards. So here’s an example of how to use these percentages to set some awesome goals.
- Figure out your monthly household expenses. Ummmm…if you’re reading this blog, this is the easy part. JUST START A BUDGET! If you haven’t yet, you can go over my 5-post budgeting basics series and get yourself hooked up! I mean, everyone else is doing it, and budgets are sexy these days, so get on it! Then hop on over to my post on how to setup a budget with Mint.com. Easy peasy!
- Figure out your take-home pay. I know, I know, this should be easy. But for some, your pay goes up and down like a rollercoaster, and figuring it out can be a challenge. So this is how to do it. If you’re paid bi-weekly, two checks is your take-home pay. If you have multiple streams of income, take your last 6 months of income, and use the LOWEST NUMBER. If your paid monthly…well…..I can’t help you.
- Figure out your percentage. Here’s the math:
- MAKE IT HAPPEN! Now that you know what your monthly percentage COULD BE, make it so! If your formula dictates that you could be saving 20% of your take-home pay, and you’re still at 8%, then you need a budget check-up. Go through your spending and cut the crap out of it, so you can now use your extra money for something more useful. And if you still aren’t motivated, take that extra 12% you are saving and throw the numbers into a retirement calculator over the next 30 years at 8% average. Motivated yet?
As always, I encourage people to figure out their priorities before setting goals, because how the heck do you know what you want if you can’t spell out what’s important to you?! Then you can take a lesson from my 13-year-old cousin on setting goals.
So, since I am writing a blog on budgeting and saving, and am doing a pretty horrible job on the latter, I need to set a challenge and walk the walk here. I said above that I would love to start saving at least 5% of my take-home pay to accelerate my retirement savings. So I am now challenging myself to hit that goal, starting in the month of October (September is already screwed, dangit!). I will save 5% of my take home pay, and drop it straight into my Roth IRA. BOOM! (and I’ll be honest, this is going to require some sacrifice).
So, whaddya say? Want to join me here? Can you increase your savings by a small (or large) percentage starting next month? Can you make some choices to help cut the junk out of your monthly spending and start living like a frugal rock star?