Why (and How) We’re Saving Half Our IncomeKathleen Celmins
At the beginning of this year, I sat down and wrote out a long list of big goals I wanted to accomplish.
Buried somewhere in the middle was the following: (Joint) Save $75,000.
My fiancee and I are combining finances this year (though our exact method is still somewhat up for debate), and we decided that together, we’d save $75,000.
There are a number of reasons we chose this number. One, it’s a nice round number. Two, it sounds really hard. Nearly impossible, really. It’s more than my salary by myself! But the real reason is that $75,000 represents saving half of our income (combined, before taxes). And there are many Americans that are able to support a family of two (plus one dog) on $75,000. If we can do that every year, and live on just half our income, we’ll be setting ourselves up for a fulfilling, frugal life.
Another reason we’re focusing on saving half our income is to buy ourselves some flexibility. We’re childless (for now), and when our bank accounts feel too heavy, we do what we’re told we should do: spend it. But what are we giving up when we spend all that money? What does that fancy dinner out cost us? Is it worth working more at the end of our lives in order to fund our vacations now?
We don’t think so. We’re thinking about our future together and the life we want to build. We live in a great little condo in a fun neighborhood, but we both know that a two-bedroom condo is not our forever home. The housing market in our area is crazy right now, and it’s probably going to continue to get crazier. That said, we want our next move to be a move into our forever home. One more move, and done, for the rest of our lives. But we know that the kind of house that will work for us forever (4 bedrooms, an office, a yard, near good schools) isn’t going to come cheaply. We’re comfortable paying our current mortgage, and we’d like to be able to move somewhere awesome without increasing our monthly expenses (or at least not increasing them too much). The only way we can do that is to have a big down payment. So we’ll save. And every year that our income increases, we’ll save more. We’ll be able to hedge against lifestyle inflation and keep our eyes on the prize.
So that’s our “why” — now, how on earth are we going to accomplish this?
Max Out IRAs
I have a traditional, he has a Roth. Both “max out” at $5500/year. That’s an “easy” $11,000. Now, only $64,000 to go!
401(k) (for Him)
The maximum annual contribution for 2014 is $17,500. I don’t have a 401(k), but my fiancee does. He’ll max this out. That leaves us with $46,500 for short-term savings.
Paying interest is certainly not savings (not by a long shot!), but because paying down principal increases equity in our home (which increases the owned percentage of our asset), we count that as savings. The total is ~$635/month, or $7,650 for the year. We considered paying more toward principal every month, but decided that since our short-term (5ish years) goal is to buy a house, the more cash we have on hand (vs. tied up in equity!), the better.
Health Savings Account
My fiancee’s health insurance features an HSA, which allows us to keep pre-tax money and use it for medical expenses. There’s a $3,300 cap on individual contributions, but once we’re married, we can contribute $6,450.
An Interest-Bearing Checking Account
I have an account at my local credit union. It pays 2.25% interest on balances up to $15,000. (As an aside: if you’re not looking at credit unions, you may be leaving money on the table!) I started the year with $8,400 in that account and will add $6,600 in 2014. After that, I’m going to continue funding our …
Non-Retirement Savings Account at Financial Services Company
Investing sounds scary, but I’m going to give it a whirl. Nothing too crazy, though. I mean, I’m not about to quit my day job to become a day trader or hedge fund manager! But my fiancee has a non-retirement investment account with a very conservative portfolio featuring a diverse range of low-risk, inexpensive funds. He has it set up to contribute $400 automatically every month, which is already $4,800 in savings. Plus, he puts in any supplemental income from his job into this account. After my interest-bearing account is topped up, I’m going to focus my savings efforts here.
Tax Refunds & Employer Bonuses
People tend to treat tax refunds as “found money,” spending them on shiny new toys. Not us! Any money we get in the form of refunds (or employer bonuses) are going straight into our savings account.
A Visual Breakdown
So that’s how we’re doing it. We’re saving money to fund our long-term and short-term future. We’re trading in extravagance for simplicity. We’re moving a lot of money into places that are hard to “touch” so we’re not tempted to nickel and dime our way out of frugality. We’re automating savings.
Will it be easy? Heavens no. Not by a long shot. But if I could save half my income when I was single and living by myself, then we can do it together.
We’re lucky because we don’t have to give up much in order to save. We know that. Kids are expensive, and this will become more challenging when we’re not just two people, with two incomes, and few other fiscal responsibilities. But at the same time, we know that the habits we create now will become habits we keep for life.
I’ll check in to report on my progress as the year goes on.
Join me! Even if you can’t save half, I know you can save more. And money in the bank gives you peace of mind (and all kinds of other benefits!) to take with you.