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How to budget $70,000
Three real budgets, analyzed
 
So long, NFL RedZone.
So long, NFL RedZone. (Courtesy Shutterstock)

If you ask most people, they'll probably say that budgeting isn't terribly titillating...unless, of course, we're talking about someone else's finances.

Let's be honest: Although you may not want to fess up to just how much of your monthly budget you blow on eating out each month, it's easy to judge the bad spending habits of others — like the next-door neighbor who just bought a second set of pricey wheels.

Yes, there's nothing like financial voyeurism, which is why we convinced three brave people, whose annual household incomes come in at around $70,000, to share the details of their monthly spending — and saving — habits.

And we do mean every detail: Each intrepid participant divided his or her budget into percentages, which were then color-coded in line with the 50/20/30 rule. The rule recommends that you allocate 50 percent of your budget for essentials (housing, transportation, utilities and groceries), 20 percent toward financial priorities (retirement contributions, savings, and debt payments), and the remaining 30 percent for bonus (read: fun) lifestyle expenses.

We then asked Nancy Anderson, a CFP® with LearnVest Planning Services, to review each budget to see how they are mastering their money — and where there's room for a little financial improvement.

Dave, 42, civil engineer

I recently got a new job after being laid off earlier this year, and while I'm happy to be back at work, I had to take a pay cut in the process. My wife and I have two kids under the age of 12, so she works part-time as a teacher's aide here in Utah. To keep our costs in check, she's been great at re-examining our budget recently, and we've made cuts where we can. For example, she stopped going to Pilates, and I canceled my cable TV subscription to NFL RedZone — as much as it breaks my heart!

I'm also tempted to remortgage our home, but we're on track to pay it off right before my daughter goes to college — and I know that I'll need the extra money more then than I do now. But I do worry about costs as my kids get older: Between my 12-year-old wanting to do nothing but shop, and my 8-year-old boy going through a growth spurt like every other week, it seems like we spend all of our money on clothing.

Luckily, I was able to contribute close to 50 percent of my paycheck to my 401(k) before we had kids, so even though I know it's not the smartest move, I've scaled back on my current contributions. Maybe as the kids get older, my wife can start working more, but for now, we're making it work.

What Nancy says: Congratulations to Dave for finding a new position in a tight job market! And they're doing a good job of still saving almost 10 percent of their income — even with a pay cut.

But instead of refinancing or cutting too far back on his retirement contributions, Dave should consider reducing even more of his family's regular recurring expenses, like he did with the NFL channel. Do an energy audit. Set up a clothing swap with friends who have kids around the same age. Consider a ride share to reduce overhead. Dave has a great start for retirement, but he should be careful not to borrow from tomorrow for today. He can start by bumping his contributions to his 401(k) at least up to the match, and then increase it incrementally from there.

Kara, 45, financial analyst and project manager

I'm divorced, with no kids. And I live in a two-bedroom townhouse just outside Atlanta that's on a lease-purchase plan, with a roommate who also contributes about 35 percent toward groceries and utilities.

I work from home, which impacts my budget in a couple of ways: I have to pay for faster Internet, and my utilities are higher because I'm around all of the time. On the other hand, my car doesn't get as much wear and tear, and I don't have high fuel costs — I fill it up maybe two times a month!

I'm currently paying off back taxes from a previous business venture, and I took out a $13,500 loan through my credit union to cover them. About 20 percent of my net income goes toward the principal on that loan each month. It's a five-year loan, but since the interest rate is high at 14.95 percent, I plan to pay it off in the next 18 months.

Once the loan is paid down, I'll be able to allocate close to 50 percent of my income toward savings by maxing out my IRA contributions each year. Currently, I'm only contributing five percent to my 401(k) because that's the amount that my employer will match, and I don't see any sense in contributing more right now.

What Nancy says: Kudos to Kara for such a high savings rate — 21 percent — while still taking a big chunk out of her monthly budget to pay down high-interest loans. She has done a good job of keeping her expenses low in order to help her save. To save even more, I'd encourage her to keep track of any home office expenses that may be tax deductible — even a small tax refund could have a big impact.

That said, I'm definitely in favor of increasing her retirement allocation because the 5 percent total contribution rate may not be enough to fund her retirement. I'd recommend running a retirement calculation to motivate her to do more now. Once the loan is paid off, I would also have Kara designate a small amount of money for a “fun account,” so she can enjoy life while still saving and investing for the future.

Karrie, 26, brokerage associate

My husband and I have had some big changes recently, so we're still adjusting to our new financial situation. In January, my husband left active duty in the Air Guard to go back to school for his bachelor's degree before returning to the Guard full-time in June. I'm in the Guard too, and I was also in school full-time and working part time, before I started my full-time job in Washington state earlier this year. Luckily, thanks to the GI Bill, most of our schooling this year was covered.

We also moved this year, and we are now carrying two mortgages. But, by renting out our old house, we're making enough money to cover the monthly mortgage payments on that home, as well as put an additional $150 toward the principal each month. And, luckily, we don't have any other debt.

In a month, I'll be eligible to start contributing to my 401(k). My company matches 50 percent, so my goal is to contribute the max — 75 percent of my paycheck — through the end of the year to contribute as much as possible.

Since I started working full-time, I've noticed that our eating-out expenses have shot up. Our grocery bill is also a bit higher, since we recently decided to start eating better, trading mac and cheese for chicken and vegetables. It's obviously more expensive and more work, but it will be worth it for our health in the long run.

What Nancy says: For someone who's just starting out in her career, Karrie really has a handle on a long-term point of view when it comes to her finances. And it's great that she and her husband are taking advantage of a well-deserved benefit for their education: The GI Bill.

As rental property owners, rather than put the extra income toward their principal, I would recommend setting up a rental property savings account first that would cover services, repairs and other unforeseen expenses — including the mortgage itself — if the home is ever unoccupied.

And since time is on her side for retirement, Karrie should start her contributions at the company matching percentage, as she suggests, and then gradually increase her contributions by one percent every six months. That way, she'll hardly feel it!

LearnVest Planning Services is a registered investment adviser and subsidiary of LearnVest, Inc. that provides financial plans for its clients. Information shown is for illustrative purposes only and is not intended as investment advice. Please consult a financial adviser for advice specific to your financial situation. The people quoted in this piece are not clients of LearnVest Planning Services.


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