Financial Planning // Planning for what You Need

My wife and I have recently taken it upon ourselves to find a way to better plan for how to save more of what we make instead of just trying to earn more. We have always been working to increase our top line income as a family instead of optimizing for what we have. Obviously it’s worthwhile to increase the top line, but working from what you have and making sacrifice is a great way to release yourself from the dependence of others when making major life decisions.

Categorization

We began first by working backwards to determine what our trends are in spending. We broke everything down into 4 major categories

  1. Constant / Non Optional
  2. Constant / Optional
  3. Variable / Non Optional
  4. Variable / Optional

Constant / Non Optional

This category is to aggregate all of the things in your life that are largely constant, and you have no choice but to make those payments monthly. They are your “Needs” or your Commitments, you quite simply have no choice to easily remove yourself of these expenses without a major sacrifice.

We placed the following items into this category:

  1. Mortgages
  2. Car Payments
  3. Extra Mortgage Payments
  4. Investments / Savings
  5. Life Insurance (Investment Account)

Constant / Optional

This category is the logical opposite of the above mentioned category, you could easily make a sacrifice in this category, but frequently these are much lower cost expenses. In our example we sum the entire category and it isn’t equal to one of our mortgage payments.

Examples of some things we placed in this category:

  1. Gym Memberships
  2. HBO Subscriptions
  3. Netflix
  4. Data / Cable / Home Wifi
  5. Husband and Wife Allowance saving

Variable / Non Optional

This is probably the second most important category as it represents the remainder of your family’s “Needs” but they are highly variable based on your spending habits. We are setting conservative targets to help determine what our actual income needs are as we consider what we’d need in the event of an employment change.

Just a few examples of what we placed in this category

  1. Groceries
  2. Gas
  3. Power Bills
  4. Water Bills
  5. Gas Bills
  6. Healthcare Savings
  7. Transportation / Metro Passes

Variable / Optional

This is likely the least important of all categories but probably our biggest culprit for outrageous spending we want to reign in. We have instituted a reward based system to drive us to learn from our spending habits and drive down this category. Above you likely noticed in Constant / Optional we have a Husband and Wife Allowance account. Any savings under this category will be placed into the allowance account at the end of the month.

This is the category that represents Dining, Entertainment and Clothing. Obviously everyone needs Clothes but there are ways to search for bargains and drive that cost down. Additionally entertainment keeps you mentally healthy and it’s required. The key is to be cost conscious here and allow yourself some benefit if you are able to do it.

For completeness here are our examples in this category

  1. Dining Out
  2. Alcohol
  3. Clothing / Shoes

I’d argue that any expense your family incurs fits within one of these 4 categories. We then used the sum of all these in a spreadsheet to determine the costs per category and the sum of all of those categories.

We then broke out our current income amounts after taxes to make sure we have enough after tax income to cover our costs. Gladly we realized we are operating with a slight balance after all expenses, meaning that gives us a monthly budget buffer to save.

Additionally this allowed us to realize exactly what our yearly need is after taxes and to calculate gross income needs to change nothing about our lives. If we would have realized a major overage our negative balance we’d have looked into ways to make cuts in our budget to ensure we operate in the black vs the red.

We are making this available as a spreadsheet to help explain what’s been working for us over the years, and help others. We’d very much like to reach people who are struggling with this in their lives and we’d much like to provide advice to others to help remove yourselves of the pains of being in debt.

Here is a link to the worksheet with some example expenses to help get you started https://goo.gl/jFcpKg

If you have any questions, why not create a copy of the spreadsheet and go through the exercise of manually categorizing your monthly expenses. Leave no stone unturned, tools like Mint and Personal Capital can really be helpful. We are happy to exchange a few emails to help you and encourage you to consider some changes in your life to get to a better place.

Steps to get started

  1. Create a value for each of your expenses in the 4 categories.
  2. Place the amount of money you make (after taxes) in N8 and N9 for Husband and Wife (change to whatever the politically correct label is — partner, spouse etc)
  3. Notice that the percentage contribution you make to your family will be reflected in the column to the right
  4. The yearly need in N13 will show you your post-tax earnings need to operate a household.
  5. The Gross Need is a conservative estimate of how much money you need to earn to afford your lifestyle. If this is greater than the amount you currently earn, you should consider making some cuts in your budget.
  6. If you are job shopping, you can use this to help understand what your financial needs are as you negotiate and search for a new job. The N17 / N18 cells should show you your pre-tax salary needs to support your lifestyle.

Some things to remember, ensure you plan for saving. Consider that Constant / Non Optional. Some famous writings on Finance call this “Pay Yourself First”. Make sure you spend money on saving for family emergencies, disasters, and unexpected health care expenses. If you aren’t healthy, you can’t earn.

I am looking forward to hearing back from you on this and listening to suggestions others use to operate family household income.