Merging Into Life: Budgeting 101

[00:00:24]
Amanda’s Daughter: My favorite: tacos.

[00:00:26]
Amanda Greene: Okay, tacos it is. Let’s go make them together. You almost had me there for a minute.

[00:00:31]
Amanda’s Daughter: Tacos.

[00:00:33]
Amanda Greene: Welcome to Merging Into Life, where we navigate life’s milestones one episode at a time. Brought to you by AAA Northeast. I’m your host, Amanda Greene. Today we’re going to talk about budgeting. Getting the garbage out on time, staying on top of the dishes, exercising regularly. When I manage to do these things, I feel like I’m winning at life. But I would argue that none of them compare to the glorious satisfaction of staying on top of my money. Having a realistic budget and sticking to it feels amazing. It can be daunting, but it doesn’t have to be. So to make things easy, I’m talking to Ashley Bove. She’s got simple, straightforward ways of tracking what’s coming in, what’s going out and how to get it all under control.

Ashley is a workplace financial consultant with Fidelity Investments. She’s worked with tons of people to wade through the financial and emotional difficulties of making and not breaking the budget. I want to note that the following conversation contains great guidelines and best practices when it comes to budgeting, but does not constitute financial advice. Thanks for being here, Ashley. Let’s take it from the top. What are the key components of a good budget?

[00:01:47]
Ashley Bove: So, we’re going to go back to elementary school with buckets and blocks and start at the beginning. You want to have a bucket for each expense in your life, and we can categorize them. It’s so funny because ‘budget’ is such a scary word. But once we sit down [with clients] and go through it and really look at it, 45 minutes later, they leave and you can just see the relief. So, the way that I recommend to my clients to budget is a 50/15/5 rule.

You look at your take-home pay and you want to make sure that your essential expenses – your housing, your food, your car, everything that’s essential to your life – is less than 50% of your take home pay. So there’s your 50 bucket. Then, 15% should be going into retirement, and that is including an employer match; the goal is to have at least 15% to try to reach a year being contributed to your retirement accounts, whether that’s through a workplace plan or an account on the side. And then 5% should always go to emergency savings with three to six months living expenses. If you’ve already reached that three to six months emergency savings, just a general savings.

[00:03:07]
Amanda Greene: So that’s 50%, 15% and 5%, and that leaves us with 30% to do what with?

[00:03:13]
Ashley Bove: To do whatever you need to do. That is your spending money. If you want to take 10% and put it away so you can have a girls’ night out or have a night out, that’s for you. If you want to put that towards a vacation fund, that’s for you. If you have debt and it’s more than your monthly minimums. Your monthly minimums would be included in your essential expenses because that’s part of your bills, but any money over those minimums, that’s part of that extra 30.

[00:03:41]
Amanda Greene: And you’re saying every dollar should have a job, but I feel like I get lost in the area of miscellaneous. I live in an area of miscellaneous. So tell me more.

[00:03:53]
Ashley Bove: Yes.

[00:03:53]
Amanda Greene: Do you have money assigned as miscellaneous?

[00:03:56]
Ashley Bove: Yep. So that is completely on an individual level. What are your hobbies? What do you enjoy doing? What makes life exciting for you? Every dollar does have a job, but you have to make sure that you’re enjoying your time. You work hard. Yes, retirement is important, paying off debt is important, but if you don’t give yourself a little bit of leniency to have fun and to enjoy what you’re passionate about, you’re never going to be able to stay on budget because it’s going to get to a point where you’re so exasperated and so stressed that you don’t have an outlet to be able to bridge that gap. You need that. That is where that 30% comes in. So, if you dedicate a portion of that to debt, you dedicate a portion of that to a vacation fund, or maybe gifting is something that you enjoy doing, it brings you joy. And that is another area. There you go. That’s where that miscellaneous comes in.

[00:04:56]
Amanda Greene: If you’ve never had a budget before, how do you get started?

[00:05:01]
Ashley Bove: The first step of budgeting for beginners and what I recommend to everyone – and I hear the sigh of, oh gosh, whenever I say this – pull your bank statements, pull your credit card statements. Everywhere you have spent in the last 90 days, you have to pull. You look at every expense, and this is the worst part. I know you are not alone if this is intimidating and scary, but you cannot move on if you don’t do this step. So pull your 90 days of statements from anywhere that you’ve spent and you have to literally categorize every single thing that you spent on. So you went to the grocery store X amount of times, you spent this much each time in three months. This was the balance for that. You went to dinner and you went out to dinner X amount of times. This is how much you spent. That was the balance for that.

And once you have that, you’ll see exactly where your money is going. You’ll see what’s important to you at that point because it really puts it out there for you. And that’s where you now start to break it down. Okay, I spent $600 on going out in three months at restaurants. Clearly that’s something important. I’m going to budget $200 a month towards going out. And there you go, now you have that bucket. Whether you take that money and you put it into a separate checking account, whether you take it out and leave it on you as cash or whether you put it in envelopes – it’s completely up to you – whatever is going to have the biggest effect on you and the most lasting impact that you will actually follow through with it.

[00:06:27]
Amanda Greene: Sticking with it seems like a difficult part. Do you have any advice about sticking with it?

[00:06:32]
Ashley Bove: It’s hard. Nothing about this is easy, but in the long run it’s so beneficial. And for your mental health alone, to feel like you have it under control and to feel secure, it’s worth it. So my advice as far as sticking with it is having the self-control to make sure you do, to know that at the end of the month you can breathe a sigh of relief. And if you are in a place where you hate that feeling of, I don’t know where my money’s going, I am stressed. Can I afford this? What if this happens? Just having that cushion and knowing that mentally you’ll be in an okay space if you do this, is worth everything. And that motivation after the first month or two should be enough to really push that budget to stick.

[00:07:22]
Amanda Greene: I don’t know if this is too specific, but you know certain expenses are coming every single month. You have your rent or your mortgage, you have your car insurance, maybe a car payment, your cell phone, groceries, you know which ones are coming every single month. But what about the ones that are, I don’t even want to say unexpected, but those too. What about when your child wants to play a sport that’s maybe a seasonal thing? How do you file those into the budget when it’s not a regular monthly occurrence?

[00:07:50]
Ashley Bove: That’s where you would look at where you’re currently budgeting and take away from a different bucket that is on that miscellaneous side, reduce expenses on the essential side, if possible. Or, if you’ve already had your savings account with that three to six months living expenses, maybe take a little bit away from that. It’s just to afford that short-term loss. So it’s not something that you want ongoing. If it’s an ongoing unexpected expense, like your child is starting to become a star gymnast and you need to pay for a gymnastics program for the next 18 years, that’s different. That’s an ongoing expense. That would now go into your essential expenses category. And you have to tweak where your money is going in other places to make up for it.

[00:08:32]
Amanda Greene: It doesn’t matter if you’re making a little or a lot or somewhere in between, you should know where your money’s going.

[00:08:37]
Ashley Bove: Absolutely. And your spending is always relative to what you’re making. So someone who’s making $50,000 a year versus someone who’s making $200,000 a year, their budget is going to be very similar, they’ll just have larger amounts and higher bills in the $250,000 category as opposed to the $50, 000. But everyone needs housing, everyone needs insurance. These are standard bills that everyone has.

[00:09:02]
Amanda Greene: So, your money savings tips for creating a budgeting routine that’s realistic enough to stick to really depends on preference. Some people are going to like sitting down with a spreadsheet, others might want to stuff envelopes.

[00:09:16]
Ashley Bove: I am a digital person. I like to open my banking app and say, ‘Okay, I have X amount of dollars in this category. I have X amount of dollars for this.’ So I am kind of bank based. So every two weeks when I get my paycheck, it goes into my checking account and then I have it automatically put a set amount into the other accounts based on what my budget is for those. That’s my way. It’s kind of like a cash stuffing, just not physical. So it’s more digital.

[00:09:45]
Amanda Greene: Are there any methods that you see work really well for someone who’s just getting started, maybe opposed to someone who’s really mastered this already?

[00:09:52]
Ashley Bove: Keep it simple. That’s what I would say about budgeting for beginners. You don’t need 17 different categories of budgeting to be able to master it. It’s only 30% that you really are doing yourself, everything else is fixed. That 50, 15 and 5, that’s a fixed amount. So you want to keep it simple. We don’t need a category for nails, and then a category for hair and then a category for going out. It all goes under personal spending. As your bills become higher and as your priorities change, those categories will change. So you want to keep it general so that you don’t get overwhelmed and that it isn’t too much.

[00:10:32]
Amanda Greene: Where do people get stuck in the beginning?

[00:10:35]
Ashley Bove: ‘I don’t make enough.’ That’s what I hear. ‘I don’t make enough for my lifestyle and everything’s expensive.’ And it’s 100% true and I sympathize with that, I understand that. But you will be so surprised that when you actually go through everything, and I hate this, it sounds so cliche, but getting that $5 coffee – yes, it’s fine if it’s budgeted for – but when you’re doing a $5 coffee four or five times a week, you’re at over $ 100 a month, that’s a bill. That’s a bill.

But there are a lot of people that come back and just say, ‘You know what? Life is short. I work hard. I want my coffee.’ And to that, I say, absolutely, you deserve that coffee. You have 30% of your take home budget that you can find an amount to dedicate to that coffee. But that’s it. You want to make sure that at the end of the month you didn’t spend your entire budget on coffee and now you’re stressed out because you didn’t get to go out to dinner with friends or you didn’t get to buy a gift that you wanted to. So it’s really your priorities.

[00:11:35]
Amanda Greene: Truly. That’s something we’ve started saying in our house: We can’t do it all. So where are the priorities?

[00:11:41]
Ashley Bove: Exactly.

[00:11:45]
Amanda Greene: In your opinion, what’s more important? Paying off debt or saving money?

[00:11:49]
Ashley Bove: Paying off debt. You always want to pay your minimums. But the hierarchy of saving is what we call it, or the hierarchy of budgeting, is to make sure you have that three to six months living expenses saved. That is priority. Once your three to six months living expenses is saved, you want to then put as much as you can towards retirement because that’s in the market, it’s growing. Once you’ve hit that ceiling where you’re doing at least the employer match, if you want to then pay off debt, you can. Anything that has over a 6% interest rate is going to be your priority, which right now is pretty much everything. So the interest rate on debt right now is extremely high. Anything over 6% is a priority. That’s what you want to pay down. So to answer your question, yes, paying off debt is important, but it’s equally important to make sure that you are in a space where God forbid something happens tomorrow, you can afford it.

[00:12:43]
Amanda Greene: Ashley, when is the best time to start budgeting and saving? And don’t say when you were younger.

[00:12:50]
Ashley Bove: Yesterday.

[00:12:52]
Amanda Greene: Yesterday. What do you see to people who feel like they’re too late to this party?

[00:12:57]
Ashley Bove: Oh, it’s never too late. It’s never too late. Let’s get started today.

[00:13:01]
Amanda Greene: Can you give an example of the difference it would make to start investing earlier, maybe a 30-year-old who’s listening to this right now, versus someone who does start later though?

[00:13:11]
Ashley Bove: The biggest thing is compounding. But the more you save and the better position you put yourself in, the more you will end up having at the end. So if you think about it, if you invest $100 today and you are young, you’re 30 years old, you have a lot of time before you need that $100, that $100 will grow. Even at 5% per year, it’ll continuously grow. And because you had 30 years of that balance continuously growing at 5% per year, at the end, you’re going to end up with – I’ll just throw a number out there – say $500,000. Now, if you start later, say you are pre-retirement, you’re close to retirement or you’re close to needing that money and you put in $100. If you only have five years for it to continue to grow, you might be at a couple thousand dollars. So the number gets bigger every single month, every quarter, every year. And that interest continues to build, your money starts to work for you. The longer you have, the better. But there is no better time than today to start that process.

[00:14:14]
Amanda Greene: And I imagine seeing it grow is also very fulfilling and exciting, almost as exciting as maybe buying $100 pair of shoes that you really wanted. But knowing that you’re going to be set up later in life could maybe give you that same thrill if you’re watching it grow, right?

[00:14:28]
Ashley Bove: Yes, absolutely. And it’s so funny, I have a teenager, so I have a 14 year old who had her first job last summer babysitting. And she was so upset with me, we opened up a Roth IRA and I said, ‘You’re earning money, we’re going to put a little bit away. Not all of it, just a little.’

[00:14:45]
Amanda Greene: ‘Mom.’

[00:14:46]
Ashley Bove: Oh, she was so mad. And it’s funny, so that was last summer and she forgot about it. And we didn’t put much in there, I think it was $100, nothing crazy. And this summer, she’s starting her job and I pulled up the account and I said, ‘Okay, what are we budgeting to put in there each paycheck?’ And the account said it was up to $137 or something. It had grown. And she was like, ‘Wait, I thought it was only $100.’ And I was like, ‘No, it’s grown, Rosalie. That’s what’s exciting about it.’ And she was like, ‘Oh my gosh, I can afford the backpack I want.’ I was like, ‘No, you can’t.’

[00:15:21]
Amanda Greene: ‘I’m leaving it in there.’

[00:15:21]
Ashley Bove: It’s going to grow. Even just that little amount, seeing that difference and starting young, it made an impact.

[00:15:31]
Amanda Greene: She’s lucky to have you showing her the ropes to start young because it’s easy to be excited about your paycheck and want to just spend it all. But for her to actually have seen it grow year over year, that’s thrilling.

[00:15:43]
Ashley Bove: My biggest piece of advice if you are looking to sit down with an advisor is find someone you connect with. So it is not a one fits all rule. It is not a one fits all personality. Getting into this business, people are like, ‘Oh, you deal with numbers, how intimidating, and math.’ And I always say, this is a people business. I am in this not because I love to see a positive bank balance at the end of the month for clients – which obviously I do – but I love to see, and what internally fulfills me, is seeing someone come in nervous, of course, and then leaving the appointment.

And I can’t tell you how many times I’ve been hugged, I’ve been given thank you cards because it’s just the weight of that stress and having that plan being put into place and just having that camaraderie, having someone that has your back in a lot of ways and wants what’s best for you and is in a judgment free zone. This is not a numbers position, this is a people position. And at the end of the day, that’s all it is, that’s what sitting with a financial planner is, it’s someone who wants you to maximize your dollars for the best of you.

[00:16:53]
Amanda Greene: And not everyone has been given the tools to know how to do that.

[00:16:56]
Ashley Bove: Exactly. My biggest piece of advice along with that is to look at it, whether it’s quarterly, whether it’s semi-annually or whether it’s annually, stay on top of your plan. And if you need to make adjustments, make adjustments, but always have a plan in place.

[00:17:10]
Amanda Greene: I love the way you radiate positivity about the budget. This is really nice and I feel like I have homework to go and do. Thank you so much for coming on today and sharing all of your knowledge in this area. It is very helpful and I feel like I need to go make a spreadsheet now.

[00:17:26]
Ashley Bove: I love it. Absolutely. Thank you so much for having me. It was a complete joy.

[00:17:34]
Amanda Greene: This has been so helpful. First things first, take a good look at what you spend. Pull up your accounts from the last three months and see where your money went. Half of it should be going to necessities, 15% should go towards saving for your future and 5% goes toward an emergency fund. If you have debt, prioritize paying off the bills with the highest interest rates. And like most things, it’s easy to let it stress you out, and it will if you don’t do something about it. So give it a try. Sit down and take a look at where your money goes. Knowing is half the battle and it will be such a relief. Ashley says, ‘The time to start is yesterday.’ And I wish I knew all of this when I was younger. So why wait? Dolly, come here. Can you answer a few questions for me?

[00:18:19]
Dolly: Hello.

[00:18:20]
Amanda Greene: Are you ready, my girlie?

[00:18:22]
Amanda’s Daughter: No.

[00:18:22]
Amanda Greene: If you make money at your lemonade stand, should you spend it all on candy?

[00:18:27]
Amanda’s Daughter: No, I would save it.

[00:18:29]
Amanda Greene: All of it?

[00:18:30]
Amanda’s Daughter: Yeah.

[00:18:31[
Amanda Greene: Let’s start with 15%. We can put it aside for you and you’ll still have some money to spend now. What about if you want candy, should you borrow money to buy it or save up and buy it with money we have?

[00:18:44]
Amanda’s Daughter: Save up.

[00:18:48]
Amanda Greene: Yes, I agree. It’s way more fun to earn the money first anyway. If you do happen to borrow money from your sister, when should you pay it back?

[00:18:56]
Amanda’s Daughter: July.

[00:18:58]
Amanda Greene: Why in July? It’s best to pay it back as soon as you can because paying off your debt is important. When do you think the best time to start saving is, now or later?

[00:19:09]
Amanda’s Daughter: Never. Now.

[00:19:11]
Amanda Greene: Now is correct. What’s the best way to keep track of how much money you have?

[00:19:18]
Amanda’s Daughter: Keep it in your bank and don’t use it.

[00:19:21]
Amanda Greene: Sounds good to me anyway, as long as you’re paying attention to what you have. Is it more affordable to make dinner at home or eat at a restaurant?

[00:19:29]
Amanda’s Daughter: Make dinner at home.

[00:19:30]
Amanda Greene: It is much more affordable to eat at home, and that’s why we’re having tacos here tonight. But you do have a birthday coming up, so why don’t I put aside some money for us to go get hibachi on your birthday?

[00:19:43]
Amanda’s Daughter: Yes, I can’t wait. Thanks, mom.

[00:19:47]
Amanda Greene: You’ve been listening to Merging Into Life, where we navigate life’s milestones one episode at a time. Brought to you by AAA Northeast with assistance from JAR Audio. I’m your host, Amanda Greene. If you’re learning as much as I am, follow us wherever you get your podcasts and leave a review, we’d love to know what you think. Email us at podcast@aaanortheast.com.

The views and opinions expressed in this podcast are not necessarily the views of AAA Northeast, AAA and/ or its affiliates.