How to save more money
And get more enjoyment too!
As a financial advisor, one of the most common questions I get from clients is:
“Where does all my money go?”
Everyone asks me this question. Whether rich or poor, young or old. It seems as if every paycheck just disappears. It’s not as if you’re living the life of luxury… you’re just living day-to-day, yet money just seems to vanish.
So how to save more money?
Save more money AND enjoy more too
In this article, I will cover the #1 strategy I use to help both spenders and savers save more money. Along the way, you will also learn how to enjoy your hard-earned wealth as well. It doesn’t matter if you are:
- A young working professional: Fresh out of college earning $60,000 or less
- A mid-career professional: Well on your way to earning mid-six figures or more
- A stay-at-home parent: Helping manage family finances
- Retired: enjoying the fruits of your wealth
Everyone can benefit from the guidelines in this article. And if you haven’t heard about the method I recommend, that’s because the vast majority of how-to’s on saving more money will focus on reducing unnecessary expenses. Most guides will tell you to 1) inventory your spending and 2) cut back on your Starbucks habit. (As a side note, they’re not necessarily wrong…spending $3.00 per day at Starbucks comes to over $1,000 per year!)
But this feels like dieting!
There has to be a better way. What if you actually enjoy your daily Starbucks habit? Or what if you don’t have a Starbucks habit to cut back on?
Read on and find out more.
While I write this article from the viewpoint of women spenders, both men and women can use this method effectively.
So what is this special method I recommend?
The 50-15-5 Rule
The budgeting rule that’s not a budget
The 50-15-5 Rule is actually very simple. First, take your family’s total income and deduct federal, state and local taxes to get your after-tax income.
Then you do some division on that amount.
50% on essentials
Fully half of your after-tax pay should go to essentials. This includes housing, utilities, groceries, clothing for work, tuition, insurance, transportation, and childcare. For some, this might also include student loans or credit card interest. Basically, anything that is deemed essential to living.
What counts as “essential?” If it doesn’t bring a smile to your face when you spend it, it’s probably essential.
15% on savings
After that, you should look to save at least 15% of your income. Many companies offer matching 401(k) plans. You should also look into Traditional IRAs (or Roth IRAs if you qualify). Remaining money should be invested in solid long-term investments.
5% for emergencies
Finally, you should take 5% of your income and set it aside as cash or money market funds. This amount should be used for emergencies such as car repair, medical emergencies, and other unexpected needs.
The remainder is “fun money”
Once you have earmarked the 50-15-5 amount from your after-tax income, the remaining 30% is completely up to you how to spend!
If you want to use it on a vacation, go for it. Do you have a daily Starbucks habit? Feel free to spend on that too.
What if you want to save more or donate to charity? It’s the same answer: as long as it comes out of the “fun money” part of your budget, you can do whatever you want with it.
How to implement the 50-15-5 Rule?
“A goal without a plan is just a wish” – Antoine de Saint-Exupéry
1. Set up auto withdrawals
You should set up auto withdrawals that divide your family’s monthly paycheck into 4 different accounts. One account should be used for essentials, one for savings, one for emergencies and one for fun spending. Alternatively, you can use a “sweep” account that sweeps a certain amount into a savings account. But most importantly, you must have separate bank accounts for your different buckets. This will help you save more money because cash is deducted before you spend it.
2. Set up two separate credit cards
A. Credit card for essentials
First, you need a credit card ONLY for essentials. No fun spending on this card.
Consider getting a card like the American Express Cash Back that gives 6% cashback on groceries and 3% cashback on gas, or the Costco Card that gives you 2% back at Costco (As a side-note, I do not get any referral fees from credit card companies. I simply like recommending the best cards for my readers). And make sure this card only gets used for essential items.
B. Credit card for fun (discretionary spending)
Next, you should get a card ONLY for fun spending.
Depending on what you enjoy spending your money on, I would recommend cards like the Chase Sapphire that gives points on travel and restaurants, or the Amazon card that gives 5% back on all Amazon purchases. If you find yourself buying a great deal from a particular store, consider getting one of their cards. But most importantly GET ONLY ONE CARD. You want to start associating fun spending with that particular card.
3. Follow the 50-15-5 Rule
Once you’ve set up your accounts and credit cards, the 50-15-5 Rule becomes a breeze to follow.
Every time you go to a store or make a purchase, think yourself “is this essential”? If it is, the purchase goes onto the essential credit card or bank account. Else, it gets paid by the fun account.
At the end of the week or month, make sure both cards are paid off in full. And if you notice either the fun or essential bank account getting depleted, simply adjust your spending lower. You will soon find a happy medium of spending. Most people I work with eventually develop a “second sense” on whether something is affordable.
Benefits to the 50-15-5 Rule
1. It helps you enjoy fun things more
The problem with most budgeting systems is that they focus on constraining your spending. It might help you save more money for a while. But just like a diet, it’s easy to fall back to bad habits.
The 50-15-5 method, however, helps you enjoy “fun” spending more. That’s because it helps you differentiate between essential spending and fun spending.
Think about the last time you are at the grocery store. Thanks to modern-day retail, you were probably faced with a massive choice of things to buy.
But pause for a moment: how much of the things in your shopping cart were truly essential? Sure, the meat and produce were certainly necessary. But what about the soda pop? Was that really essential? Or the bag of cookies on sale? Maybe even that shampoo you were wanting to try, even though you already have an old bottle at home. This fun spending extends to a daily Starbucks habit too.
All of this should be considered “fun” spending. Yet notice how little joy you actually get from much of this?
People often don’t differentiate between fun and essential
We often mistake treats for essential items. I’m personally a fan of sweet and salty snacks. But it’s always shocking to me how I can open a bag of chocolate-covered kettle corn… and suddenly, the whole bag is gone. I think I can *recall* eating it while at my desk…
But did I actually enjoy any of it?
Often, the answer is “no”. The popcorn was supposed to be a joy to eat! But I’m so busy on the phone or typing at my computer that I manage to inhale the entire bag without even enjoying a moment of it. And that’s because I wasn’t present while I was eating. And so the whole bag of popcorn disappeared without me even enjoying a moment of the process.
The 50-15-5 rule forces you to be mindful
The moment you start differentiating between fun and essential spending, you will begin to notice that you will start cutting out fun spending that you didn’t actually enjoy. You will be surprised at the number of people I come across who cut out their Starbucks habit after realizing they were doing it simply out of routine. Once you start paying for fun things from a different credit card, you start to question EVERYTHING you thought was fun.
Perhaps you have a Netflix or other subscription service that you never use. Once you see that spending cutting into your actual fun goals (such as funding your daughter’s wedding or your own), you will be amazed at how quickly you can remove those kinds of spending from your life. Think of it another way. If I’d known I wouldn’t enjoy that chocolate-covered kettle corn, I wouldn’t have bought it in the first place!
2. It reduces stress
The 50-15-5 Rule makes sure you’re saving enough money for retirement and for emergencies.
As a financial advisor, I constantly see my clients worry about running out of money in retirement. You may have hundreds of thousands of dollars in home equity. Or millions of dollars in savings. But why doesn’t it ever feel enough?
Because most people don’t know how much they will need in retirement.
People who come down with chronic illnesses such as dementia or Alzheimer’s can require three to four times as much in retirement than a healthy person. But no one knows whether they will come down with a chronic disease.
But for the majority of people, the 50-15-5 Rule provides ample cushion for sustaining yourself in retirement. That’s because 15% + 5% = 20%. And 20% is a relatively high savings rate that’s still manageable. Also, major financial decisions, such as having children or travel, fall into the essential or fun spending buckets. These won’t influence your retirement savings rate.
(As a side-note, setting aside 20% may not be enough for some people who have highly deficient savings. This is fine: a professional financial advisor can fine-tune the amounts you actually need to save. The important point is that you have a clear savings goal and an automatic system to divide your family’s paycheck.)
This works for both savers and spenders
For savers and spenders alike, having a baseline savings rate reduces stress. Savers can decide to invest their fun money. They would rather spend it tomorrow and spend it today. Spenders, on the other hand, may prefer to spend money today instead. Either way, both spenders and savers enjoy their wealth knowing that their essential needs will be met in retirement.
3. It is easy to follow
One of the most important aspects of the 50-15-5 Rule is that it is easier to follow than a budget.
When people want to save more money, many believe they cannot have fun at all. That they have to downsize or cut back on essential living expenses.
But you can enjoy!
The rule should help you separate your basic needs from wants. And because you’re enjoying your wants more than before, that gives you extra cash. And that allows you to save more money.
What’s wrong with budgets?
Most budgets are too complex. These budgeting systems ask you to separate out every piece of spending. But everyone knows that going through three months of credit card statements gets you lost in the details.
Habits also change. Major expenses from months past might not reflect future spending. You might be going through major life changes too. Your kids might be heading off to college, your husband might get a promotion. Or you might even be going through a separation.
50-15-5 solves the budgeting
With the 50-15-5 Rule, none of this matters. That’s because the rule focuses on your current income and diverts it before it’s spent. Even if your income decreases, the rule will quickly adjust to your new baseline.
We seem to be great at helping our children learn about money. But when it comes to ourselves, we often lose sight of the valuable lessons we learned growing up.
The 50-15-5 Rule brings that simplicity back. Think of it as an allowance; the process of having your family’s monthly income divided BEFORE you spend it allows you to track where your money is going. And having two separate credit cards will help you save more money too.
What about housing?
With the 50-15-5 Rule, you should be spending about 30-35% of your after-tax income on housing and utilities.
If you find yourself spending more than 35% on housing, you should consider downsizing or finding a career that can better fund your lifestyle. And if you truly cannot make it work, then you must reduce the amount dedicated to fun spending.
What about student loans or credit card debt?
These amounts should go under essential spending. For those with significant student loans, you may have to cut back on housing costs to make room.
Alternatively, you may want to adjust the 50-15-5 Rule. For some, it makes sense to pay down high-interest debt quickly. That could mean having a much lower savings rate, or a much smaller fun money budget temporarily. Just until the worst loans are paid off.
What about children?
On average, it costs about $250,000 to raise a child your age 17. Private schools and colleges can add another $200,000 or more.
Children are expensive, and I would personally recommend dividing childcare expenses into a mix of essential and discretionary spending. Basic tuition, childcare, and clothing should be deemed essential. You owe it to your children to treat them right. However, private school, date-night baby-sitters, and birthday party spending should be fun money. These discretionary expenses should come at the expense of your own fun spending. Again, it is only fair to your children.
What if we can’t agree if it’s essential or fun?
This question often comes up between family members. You may view your husband’s beer habit as fun. He might say that going to a bar is fun, but buying your grocery store is essential.
But disagreements can happen with large items too. Is a fancy car used for commuting to work fun or essential?
When these types of disagreements come around, I recommend splitting the difference. Make an allowance for essentials, such as $20 per month for grocery store beer, or a $25,000 budget for a reasonably priced mid-sized car. Your husband can still buy more expensive beer or a $40,000 SUV. But that additional amount should come from fun money.
Most importantly, don’t lose sight of the big picture. Essential items, such as groceries and a gym membership, represent the spending that your ideal self would do. It’s what you would spend there was no good alternative.
Fun items, on the other hand, should make you smile. This includes restaurant meals or anything beyond what is deemed essential.
What if my spending on essentials is too high?
It might seem difficult to cut back essential spending at first. But it’s actually quite easy.
Downsizing your home can be an excellent way to save a lot of money very quickly. Many people don’t need a second or third bedroom. Simply cutting back can lead to instant savings of thousands of dollars.
Cutting back on grocery spending can also help. The average US household wastes around 50% of store-bought food, according to The Guardian. Also, you can cut your shopping bill by 20-30% by buying in bulk and freezing the remainder, or simply switching from expensive meats over to leaner, cheaper cuts.
Revisiting insurance can also help. Many workplaces already include health and life insurance. This can make personal insurance redundant. Many people can also reduce home insurance rates by installing smoke detectors and fire extinguishers. As for auto insurance, GEICO offers 8% discounts for people who own at least one Berkshire Hathaway share!
Conclusion: Save More Money with 50-15-5
People often try to save more money by examining every last expense. This can be a miserable way to save money. Worrying about every dollar causes stress and makes you feel both miserable and miserly.
The 50-15-5 Rule solves this problem. Rather than focusing on the details, the rule helps you see the big picture. You might be able to save $1,000 a year by cutting out a Starbucks habit. But many families can save $10,000 or more annually simply by downsizing to a slightly smaller residence.
The rule also opens up possibilities for professional financial advisory. Once you have a basic budget with the 50-15-5 Rule, a financial advisor can help you fine-tune the amounts diverted into each of your four buckets. They might have you save more or less than the rule suggests, for instance, depending on your circumstance.
How can we help?
If you’re looking for advice about your own finances, you can contact us for more information. We at Jurnex Financial Advisors are asset managers who specializing in helping families and individuals navigate major life changes. If you want to get started in regaining confidence over your wealth, book a meeting with us today and see how we can help.