Sunday, October 23, 2016

Budget Revisited: Avoiding the Trap of Two Incomes

Those of you who have read last week's blog post have probably been thinking about your own monthly spending habits, and the possibility of shoring them up.  For those of you who missed it, the concept is 50/30/20.  The jist of it is that you should budget your money so that your fixed expense necessities take up no more than 50% of your monthly budget (housing, transportation, heat/electric, or anything that cannot be trimmed or deleted), 30% for flexible, lifestyle expenses (these items maybe important, but could be trimmed or have payments altered if needed; think: minimum credit card or student loan payments, cable, cell phone, groceries, dining out, entertainment), and 20% for goals (paying down debt and saving for your future).

I want to revisit the 50/30/20 idea for a moment.  Hopefully this doesn't throw a wrench into your budgetary plans.  What number are you calculating your percentages based upon?  We have two incomes in my household for the first time in years.  My partner went back to school a number of years ago, and we lived off my income during that time.  Now that we are both working our income has literally doubled, but I didn't update our budget.  "BAD!  Bad personal finance writer!"  It's okay, I know you were thinking that.  Let me explain.  This move is totally on purpose.

I'm tempted to offer you a catchy anecdote that explains to you exactly WHY you should create a budget based on one incomes, but I think we should just let the numbers speak for themselves.

Let's say I take home $3000 per month after taxes.  According to the 50/30/20 guidelines, I have:

  • 50% Fixed-Cost Necessities:  $1500
  • 30%  Flexible Lifestyle Expenses:  $900
  • 20% Goals:  $600
Those numbers look familiar, right?  We used them last week.  Now, let's say we have two incomes of $3000 per month after taxes.  That makes $6000 per month incoming.  If we apply our formula (50/30/20) to it, it looks like this.
  • 50% Fixed-Cost Necessities:  $3000
  • 30%  Flexible Lifestyle Expenses:  $1800
  • 20%  Goals:  $1200
I know what you're thinking "WOOHOO!  THAT'S the lifestyle I'd really like!"

Hold it right there.  Not so fast.  Let's have some fun with numbers for a second.  What if you had both of those incomes, and budgeted to ONE of them, placing the remainder of the money into "Goals"?  It would look like this:

  • 50% Fixed-Cost Necessities:  $1500
  • 30%  Flexible Lifestyle Expenses:  $900
  • 20%  Goals:  $3600
In one year's time, that goals category would amount to $43,200!  Can you imagine what you could do with an extra $43,200?  I sure can!  While I know these were made up numbers, and your situation is different, I just want you to let this sink in for a moment.  This is house down-payments, student loan payoffs, a fully funded emergency savings; the possibilities are nearly endless.

If you are single, you likely won't be forever.  Maybe you should consider THIS strategy when you start to become serious with that special someone.  If you are in a couple, can you squeak by on one income?  In my household, we have done so for years.  It was purely circumstantial, but one of the smartest moves we've ever accidentally made.  Since I've always been the bread-winner, we will continue to budget to my income, and add my partner's income directly into the "Goals" category.  One year from now, we will have more than $10,000 in debt paid off, have 2-3 months of our emergency fund funded, and paid for a new roof on our rental property in cash.  That feels amazing to me.

If you are in a couple that has already bought a house, and you budgeted to two incomes, maybe you can't live off one.  Review your budget.  Could you live off 1.5 incomes?  Try it for a 2-3 months.  You might surprise yourself.

If you are in a couple, and rent.  I want you to seriously consider buying a home (assuming you have that as a goal) that could be paid for on one income even with other bills.  If you are single,  you have not yet combined finances with another person.  when that comes down the pipeline for you, don't you dare budget to both incomes.  Regardless of your goals, you will meet them much more quickly if you avoid the trap of two incomes!

Note:  I started using this phrasing "two income trap" years ago.  I didn't even realize that the fabulous Elizabeth Warren has written a book using this same title.  I have not read it, but have added it to my list.  I just wanted to point this out for a couple of reasons.  1.  Some of you might want to read it.  2.  This post is in NO way meant to relate to that book in any way.  I am sure it is fabulous, and I would like to read it, but my thoughts and ideas are not intended to relate to it in particular.

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