So you’ve now you’ve figured out your Basic Number and your Luxe Number. Congrats. Now we’ll spend some time discussing how to go about saving if your income changes every month. An easy way to sock away money is by automating your savings, but scheduling recurring deposits into different accounts or putting it toward your debt, retirement, that sort of thing. It would be great if a budgeting app existed out there, but unfortunately there isn’t one (or not one that I know of, at least). One method you could try is the Tiered Approach. Here’s how:
Step 1: Determine Your Priorities
Time This Will Take: 1-2 hours
Figure out which areas of your life are most important to you right now. It helps to know what your money pits are, and what you need financially to save you from treading in dangerous financial water. For example, say you are a freelancer and the last year or so your income has been fluctuating wildly, or you are just starting out. So you probably want to put some money toward your emergency savings fund. Or maybe you have crippling credit card debt, and that’s your priority. So here’s a possible list of priorities, in order:
-Emergency Fund
-Pay off Credit Card Debt
-Student Loans
-Retirement
-Trip to Asia
With your debts, please keep in mind these are payments they are in addition to the minimum payment you are making each month. Those payments should’ve been included in your Basic Number.
Step 2: Allocate the Numbers in Your Luxe Fund Accordingly
Time This Will Take: 1-2 hours
So say your Luxe Fund is generally $400-700 a month. You divvy that money up according to either 1) percentage, or 2) by dollar amounts. The benefit of doing a percentage is that all your priorities will be accounted for; you’ll sock away money each month. So if you have five priorities such as what’s listed above, you can figure out the percentage you want to put into each one.
For example, you could put an even 20% in each, or maybe a 40/15/15/15/15. If you are doing by dollar amounts, you might want to put $200 in each fund. So if you are having a tougher month and rake in $400 in your Luxe Number, you’ll only have enough money to put toward your E-fund ($200) and Credit Card Debt ($200). That’s certainly nothing to scoff at. As for which approach, it’s completely up to you. If you’re not sure, spend some time thinking about what you would feel better off doing. There’s a little bit more math involved with the percentage option.
The benefit of having predetermined allocations figured out ahead of time is that it will save you time at the end of each month. Plus it will help keep you on track. If you see that you have an extra $200, and your priorities have been figured out, you’ll know exactly where to sock away that money. Oftentimes when we have extra money we just blow it on something silly.
Step 3: Experiment as Needed
If you’re not sure how to go about allocating your funds, try out different approaches. Maybe the percentage approach for a few months, then switch to the dollar amounts. Or if you really need to sock away money into your Emergency Fund, then put three months of all your Luxe Number into it until you get where you want to be. There’s no hard and fast rules; this is merely a suggestion and a place to start to help make things easier for you.
One other thing: if you have extra money feel free to enjoy yourself and splurge once in awhile. You don’t want to feel deprived.
Next time we’ll go over emergency funds in greater detail.
Got questions? Shoot me an email at jackie[at]cheapsters[dot]org.
