Monday, April 01, 2013

Budgeting for Lazy People

Successful budgeting can be summed up in a single key principle:

Live below your means.

One often hears how important it is to live “within one’s means,” but this isn't good enough. Such a level of spending makes saving impossible. In order to save, you must learn to be happy living below your means (i.e. spending less on fun than you are actually able to spend, given your income).

You can’t save if you don’t earn! Until you begin your career, make sure to set your sights on well-paying  employment and/or side hustles that will enable you to live comfortably and happily well below your means.

Until you earn average local income, save at least half of each paycheck after taxes and essential expenses are paid (your “disposable income,”) and spend the rest on whatever you want.

The Rule of Fourths

Once you’re earning above average income, budget roughly one fourth of your gross earnings (total income, before any deductions) into four major categories:

1. Taxes

2. Living Expenses

3. Savings

4. Spending (fun)

The amounts committed to each area probably won’t amount to exactly 25% each, but do your best to approximate that number.

The savings category should be split in roughly equal amounts between tax-advantaged retirements savings (401K, IRA, Roth IRA, etc.) and general investments (those with no particular tax advantages). Be sure to reinvest all earnings from your investments, to take advantage of the power of exponential growth (compounded earnings).

The spending category includes travel, toys, entertainment, and anything and everything else. Have fun spending this money any way you wish. You’ve earned it. Enjoy life and make memories!

Once you earn enough that your monthly expenses comprise roughly half of the budgeted 25% of your gross income (about 15% or less) … congratulations! It’s time to move up and incur higher expenses (e.g. move to a nicer place, buy a better car, get premium cable tv, etc.).

Once your household income is above average, observing the Rule of Fourths is a simple, effective way to sensibly balance four key requirements of a good life: living lawfully, prudently, comfortably, and joyfully.

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