Being an amateur financial type person, I sometimes like to look over what other people are doing with their budgets and talk about how I’d fix it. 🙂
Budget Hacks 101 <— Here
Today, I’m going to break down a budget I saw them talk about on Learnvest.com as I didn’t agree with the CFP’s recommendations. The main thing I disagree with is people saving up several months of TAKE HOME pay. If you have an emergency, you need to cut out the frou-frou stuff, so the woman in question doesn’t need nine months of take home pay, she needs a minimum of six months of EXPENSES…which are too high, and which brings me to the breakdown.
The problem is that she has about $2500 left over every month to save and doesn’t know what to do with it. She has no retirement and wants to save up for a down payment on a house and doesn’t know what to prioritize. The CFP recommended she split that money between beefing up her emergency fund, saving for retirement, and saving for a down payment on a house, keeping her $8000 car loan that’s eating up over $300 of her pay a month.
In order to buy a house in her timeline with 20% down, which is super smart, she needs to save $1800 a month. But she can’t do it with the CFP plan and will have to push her goal back a good three years. Instead of splitting up her extra cash several different ways, I would recommend a more focused approach to reaching her goals. It will still push her timeline back, but only by about 10 months. Much better than 3+ years!
First, I would trim down her budget. And I would start by recommending she pay off her freaking car so that she has that extra money to fuel towards her goals. She gets lump payments sometimes and that will go a long to getting that stupid car knocked off. Savings: $320
Second, she’s a single woman buying $550 worth of food a month? PLUS $150 on coffee and drinks? Seriously? No, no, no. She needs to cut that. It doesn’t matter how much, but I would say, the $250 for groceries is probably fine. The $300 for eating out is ridiculous! That can be cut in half, at least. It’s called cooking. And she can do plenty of that on $250 a month. Savings: $150
Next, she needs to lower her health and car insurance. She’s paying way too much for those things. She also doesn’t have renter’s insurance, which she definitely needs, and it’s really inexpensive, so I would say she might break even between the car insurance and this, especially if she packages them with the same company and raises her deductibles. Savings: $100
She’s spending $550 in travel and transportation costs a month and $300 on hair, makeup, and clothes. That is also ridiculous. Gasoline is costing her $100. I have no idea what she’s spending the rest on as she didn’t say, but based on the description of her job and how much she spends on eating out, I think it’s over-inflated. I also think her rent is too high, but I don’t know much about the area, so I’ll leave that alone. I’m going to lower the travel to $350 because I’m sure she can cut that back, thought I would love to cut it completely. I have no idea why she’s spending so much on clothes and makeup, but I know makeup is expensive so I’ll just shave $100 off of that. She needs to stop buying so many clothes though. Just in general, it sounds very, very wasteful. This is what a washing machine is for, and I would have her stop dry cleaning crap if she’s been doing that. Savings: at least $300.
She’s self-employed, so she definitely needs to build up the emergency fund. Since she will now be completely debt free and already has $10k in savings, I would tell her to beef up the emergency fund to $20000, which will cover a little over 8 months of expenses. Then we’ll have an extra $870 a month easy without her having to sacrifice looking good and a social life. She has no other debt so she can have some fun. I didn’t touch her entertainment budget or anything else because those all seemed reasonable.
Pair this money with her current overflow and we now have a total of $3370 to put towards her goals a month! Now she can save up for that down payment to the beat of $1800 and still have $1570 left to save for retirement! She won’t need ALL of that for retirement if she’s only looking to max out her Roth IRA, so she’ll be able to save for that down payment even faster now.
As long as her new house payment is close to her rent or under, she’ll be doing very well for herself! She can even over-inflate some parts of her budget again, if she must. 🙂
Wow…I’m excited for her imaginary plan. ^_^