Feb 4, 2020 | Blog, Budgeting
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You’re ready. You’re sure of it.
You pull up your spreadsheets, dust off your calculator, and grab your workbook.
This time it’s going to be different. You’re going to create a budget… and stick with it!
Only, it’s never different. Time after time you’ve tried to get your finances under control, and time after time you’ve failed.
But what if I told you that there were two tricks that you could use to change that?
By making these two small shifts, you’ll be able to stick with your budget and meet your financial goals.
Not only are these tricks super easy, but they will work for any budget.
“Will these tricks work for low-income families?” Yep!
“What about if I just want to save more of my money instead of blowing it?” Yes!
“But we are a single-income family, can it really work for us too?” Definitely!
We’ve been using these tricks since we got married and were living on one very low income. We used it when we were both working outside the home. And we continue to use it today as a single-income family with two kids.
So I would bet you money that it will work for you. 😉
It all comes down to a mental shift
Most budgeting problems can be solved by two tiny little mental shifts.
“Really, Kassy? That’s all it takes? Changing how I think?! That seems too simple.”
I wouldn’t have believed me either, if I hadn’t tried it! But stick with me and you’ll see how this works:
The Two Important Paradigm Shifts for Success
1) Think of your budget in terms of percentages instead of dollar amounts.
When most people start budgeting, they go straight to the numbers. They don’t bother looking at what percentage of their money they are spending, saving, or giving.
They think that the numbers in their budget are fixed and unchangeable. So they let the numbers control them.
Here’s where the shift takes place: If you decide the total amount of money that you can spend on expenses before you begin your budget breakdown, you are in the driver seat.
Not only does using percentages put you in charge, it will allow your budget to work onany income.
2) Reverse the way you allocate your money.
Most often, when people are looking at their numbers, they look at their expenses first.
What’s left after all of the expenses have been met is saved.
And if there is anything left over after that, then they give.
That’s backwards!
If you have an unlimited pool of money for any and every expense you want, your expenses will grow until they drain the pool.
There will never be anything left for savings, and there will never ever be anything left to give.
If saving, paying off debt, and giving are important to you, you must allocate your money in reverse!
So how do you change these habits?
With a little bit of math.
First Things First
If you are new to budgeting, I need to quickly go over a small detail: Gross Income vs. Net Income.
This little distinction will save you so much frustration!
Never, under any circ*mstances, base your budget off of your total salary or hourly pay.
If you do this, you will be frustrated every month because you will never have enough money to cover your expenses.
It just won’t work.
(If this is boring or obvious to you, go ahead and skip down to How to Use Percentages, I won’t be offended.) 🙂
Gross Income
Your gross income is your total salary or paycheck before taxes.
This is what your employer tells you that you make. But let’s be real, you don’t actually see that amount of money.
If you base your budget off of your gross income, you are making a huge mistake and setting yourself up for lots of frustration and probably failure.
The only time you should worry about this number is when you are job hunting.
Net Income
Net Income is commonly referred to as take-home pay, or what you make after taxes.
Any time I say “income” when we are talking aboutcreating your budget, I mean Net Income.
This is the number that shows up in your bank account or on your paycheck after all of those FICA guys have had a crack at it.
The only exception to the rule is that some people like to base their giving off their gross income instead of their net income, but I’ll explain more about that below.
For now, just know that you should only think about your Net Income while building your budget.
Got it? Ok, back to how these tricks work.
How to Use Percentages to Build Your Budget
When you are building your budget, you can obviously use any percentages that you want… It’s your money after all!
But I’m going to show you the percentages that we have used (and still use) on a variety of income sizes in our almost 10 years of marriage.
These percentages will work if you are just starting out, paying off debt, or have plenty of money coming in!
The 70/20/10 Rule
The 70/20/10 rule is going to give you the most basic structure for your budget.
You’ll decide the total amount for every single item on your budget once we get this structure set up, but be careful not to needlessly increase your expenses as your income grows.
For example, you don’t need to increase your food budget just because you make a little bit more money.
Giving yourself a broader outline allows for you to make adjustments and add things into your budget as needed, without needlessly growing the amount of money you spend on transportation or housing, for instance.
Here’s how it works:
Expenses (Everything it costs you to live): 70% of your income (Take-Home Pay)
Savings/Debt Payment: 20%
Giving/Donations/Tithe: 10%
Let’s get into the details:
Expenses: 70%
When you use the 70/20/10 Rule, your expenses should be less than or equal to70% of your net income. Never More.
Expenses (<) or (=) 70% of Net Income (Salary-Taxes)
How do you know what 70% of your Net Income is?
Take your Net Income and multiply it by .7. The answer is 70% of your net income.
Example: For easy math’s sake, let’s say your Take Home Pay is $2000 per month.
$2000 (x) .7 (=) $1,400
In this example, $1,400 would be the maximum amount of money you can spend on expenses.
Debt Payment and/or Savings: 20%
The next 20% is allocated to Debt Payment and/or Savings.
Debt Payment/Savings (=) 20% of your Net Income (Salary-Taxes)
So if our take home pay is $2,000 a month. Our Debt Payment/Savings amount would be:
$2,000 (x) .2 (=) $400
If you don’t have any pressing debt, this money goes directly into savings.
If you are just starting out, begin by building up an emergency savings account (check out this post for how many savings accounts you should have to easily manage your money).
How to Handle Debt:
If you have any debt, your first order of business is to get rid of it! Preferably as quickly as possible.
Use this 20% of your income as additional payments on your debt until the debt is gone. Then go back to putting this money in savings.
Notice that I said additional payments. Your car payment(s), your student loan payment(s), and your mortgage should all come out of your expenses. This 20% of your income is for extra payments!
I’ve found that everyone has different logic as far as good debt/bad debt qualifications. You have to decide for your family what is important for you to pay off.
But here’s the thing, any debt that you can pay off is more money that you will have at your disposal each and every month from now until eternity.
“Say What?!”
Yep, it’s true.
Think about it:
Every car payment you make could actually be going into a savings account for that amazing family vacation you’ve always wanted to go on.
Every credit card payment could be saving for a kitchen remodel.
Every student loan payment could be allowing you to stay home with your kids.
Here’s How We Handle Debt:
Like I said above, you have to choose what debt is worth it to you to pay down.
In our family, these are the types of debt we would pay off quickly: (And when I say quickly, I mean we throw every bit of money we can find at it until it disappears.)
Debt We Paid/Pay Off Quickly:
Student Loans:
A lot of people consider student loan debt to be good debt. We didn’t.
We did the math and realized how much extra we would be paying on our loans if we made the minimum payment every month for years on end.
We paid off our loans as quickly as we could and saved ourselvesthousands of dollarsin interest.
That’s a lot of mulah that we now get to keep in our pockets!
Paying off our student loans is one of the main reasons I am able to stay at home with my girls without having to worry about making a full-time income.
Car Loans:
A lot of people think that having a car loan is a fact of life. Again, we don’t.
We only purchase cars that we know we can afford to pay off within a year. Worst case scenario, we know we can do it in two. Then we drive that car until someone else totals our vehicle… It’s happened twice now.
Not having a car payment is another reason that I am able to stay home with my girls. So it’s worth it to us to pay our cars off quickly. Then to drive them until they die.
Credit Card Debt:
Credit Card Debt Payments would belong in this category as well.
If you tend to get into debt using credit cards, pay the debt off quickly… after you cut the cards up and throw them away.
Don’t get any credit cards again until you have all your debt paid off and have a handle on your spending.
We make money off of our credit cards because we only use them when we know we can pay off the balance at the end of the month… then we take the rewards to the bank!
The reason we chose to pay off any debt quickly was that we had a goal of becoming a single-income family when we had kids. Not having debt gave us the freedom to do that.
Pro Tip: If you can pay extra money, make sure every penny is going against yourprincipal amount onlyand not toward the interest on the loan. You will pay it down a lot faster that way!
Don’t just make double loan payments when you’re paying off debt!
Debt we don’t pay off quickly:
Mortgage Loans:
The reason that we aren’t paying off our mortgage quickly is that we were transitioning to a single-income household when we purchased our home.
While we were careful to purchase a house that we could afford on one income, it would be a big stretch for us to make additional payments on our income.
Even if we were able to make extra loan payments, it would still take us a very long time to pay off our house.
For us, it was more important to spend the money that we would have been using to pay off our mortgage on swimming lessons, music lessons, and a family vacation here and there.
But if you can afford to pay off your home and it is a priority for you, go for it!
You need to evaluate your debt for yourself and your family. Pay off what you can, and make your regular payments on the rest.
Giving: 10%
In our family, we tithe 10% of our income to our church.
If you don’t belong to a church, or you don’t want to give to your church, there are other things that you can do with this 10%.
Give to a charity, find a cause, or help someone pay for college… Get creative and give back.
No one ever regrets giving to charity and making the world a better place.
Obviously, you aren’t required to give any of your money away, it’s your money.
But I highly encourage you to do something with the money that is bigger than yourself, even if it is just putting the money into a college savings account for your own children.
For our $2000 net income example, we have been using, the charity amount looks like this:
$2,000 (x) .1 (=) $200
Gross Income vs. Net Income Giving
Now, remember when I told you that you could give off of your gross income (your total salary) instead of your net income (your take-home pay) if you wanted to?
Some people, ourselves included, choose to give this way.
(Don’t worry, I’m not going to try to convince you to do this. You should do whatever seems right to you.)
But I wanted to walk you through the process in case you wanted to give this way as well.
Your numbers won’t work out beautifully if you do this. You can’t give 10% of your gross and still expect to spend 70% of your income on expenses and 20% of your income on savings.
Something else will have to give.
If you choose to give 10% of your gross income, I suggest you take the extra giving out of your expenses instead of your savings.
Here’s How You Do The Math:
Calculate your Giving:
10% of your Gross Income in this scenario
Calculate your Savings:
20% of your Net Income
Use the Remainder for Expenses:
For us, this works out to be about 67% of our net income for expenses.
If you prefer to use the nice round numbers of the 70/20/10 rule, you will have to do everything based off your net income.
Now Think in Reverse
Each month when you allocate your money into each category, I want you to do it backward!
1) Give First
Take your 10% of each paycheck and make a payment to your church, charity, cause of choice, or college fund.
Do this before you do anything else!
Why do we give first?
If we wait until the end of the month and give last, there won’t be anything left to give. Everyone is naturally selfish and if we don’t set aside the money that we want to donate, then there won’t be anything left at the end of the month.
Money has a way of sneaking away undetected if we aren’t intentional with it.
2) Pay off Debt and Save Second
The same logic applies here. If you don’t pay yourself next, you won’t get around to it!
Twenty percent of your income won’t be magically sitting around at the end of the month waiting to be saved.
Have your money auto-draft to your savings account or have an automatic loan payment set to go out the day you get your paycheck(or the day after you get paid, just to be safe, you don’t want to overdraw.)
Pretend that the money never existed!
3) Use the Remaining 70% or less for your Expenses
Now that the important stuff is out of the way, use your remaining 70% to live on.
If you find that 70% isn’t enough, get creative and cut some expenses. Check out my post10 Surprising Ways to Save Money When You Are Living Paycheck to Paycheckif you need some ideas.
Here’s a quick Recap of the Two Simple Tricks:
1) Think of Your Budget as Percentages Instead of Dollars:
Expenses: 70%
Debt Payments/Savings: 20%
Giving: 10%
2) Reverse the Order:
Give First
Save/Pay Off Debt Second
Spend Third
I hope these two simple tricks make your budgeting journey easier!
You May Also Enjoy…
Ready to Build That Budget? Read How to Start Budgeting: A Beginner’s Guide to Creating a Budget, Cutting Costs, and Saving Money.
Do you need to cut some expenses? Check Out 10 Frugal Living Tricks for Saving Money and 37 Ways to Save Money on Groceries.
Do you worry about what your friends will think if you start sticking with a budget? I’ve got you covered with Seven Powerful Mindsets for Single Income Families.
Teach your children how to budget with The {Simplest} Budgeting Method for Kids.
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