My Daily Dollars

Visiting friends of ours over the weekend made us re-evaluate my new zeal for frugality, just a bit. The couple has a lovely home, several expensive cars, and travels on a regular basis. “They certainly make more money than we do,” I kept reminding myself. “This is why we don’t want to live in a larger home: the keeping-up-with-the-Joneses syndrome.” My husband and I both knew that we don’t have the means to copy their lifestyle, nor do we really want everything they have. However, the next day, before I could stop myself, I snapped at my husband for eating one too many wedges of Laughing Cow cheese: “those have to last a whole week!” We turned it into a joke, of course, but it was a very telling moment. I’ve been so swept up in pinching pennies that our lifestyle is starting to feel, well, pinched. Time to do some re-evaluating!

Fortunately, I’ve been reading a new book, All Your Worth by Elizabeth Warren and Amelia Warren Tyagi. This mother-daughter team — the mom’s a law professor and the daughter’s a financial consultant — wrote The Two-Income Trap, which I also really enjoyed. In this follow-up volume, they seem sensible and their advice is straight-forward: balance your finances just like you balance your diet. Of course, you know I like a good food metaphor!

They’ve developed a formula to help you pay off your debts and achieve your long-term goals. Take 50% of your budget for “Must-Haves,” all your monthly bills like the mortgage, insurance, gas, out-of-pocket medical expenses, etc. Then, divide the rest into 30% for “Wants” and 20% for “Savings.” If you have any debt, put that 20% toward the debt first.

Now, my husband’s income varies because he’s self-employed, but he roughly makes twice as much as I make. So, I took my take-home pay, doubled it, and used that for the percentages. First off, I found that we are actually pretty darn close to their formula! In fact, our Must-Haves are more like 45%, so we can save a little more aggressively with 25% of our monthly budget. I divided the “Wants” category into what I spend each month, gave the same allowance for my husband, and the same for us to spend on his daughters, and still ended up with a nice amount for vacations and Christmas.

The exciting part was extrapolating what we can do with the savings after fifteen years. We could pay off the mortgage and still have a solid “freedom fund” for travel or a fun car or a goat. (We’ve been daydreaming a lot lately about having a place in the country with goats. They’d help cut the grass and provide the fixings for great cheese!) The husband and I discussed the pros and cons of paying off the mortgage early, especially because he’ll pay off his business’s mortgage by then anyway. We agreed that we first want to finish up funding our emergency account. Then, we’ll put all of our savings (besides retirement savings) to pay off the home equity loan on the house. After that, we may invest everything or at least pay off the mortgage a little early.

In any case, I really love the formula because it gives you some solid guidelines to plan for the here-and-now in order to get results in the far-and-away future. With just 20% of our income socked away, we can achieve our dreams. I don’t need to cut back any more than I already have, nor do I have to throw every penny into long-term savings. I’ll share more of their advice about trimming “Must-Have” expenses in my next post. Oh, and Monday, I stopped off at the store and bought my husband some extra Laughing Cow.

images by equality, foxypar4