Becoming a millionaire is so passé these days, becoming a billionaire is the new goal. Or …maybe it’s being able to stop living paycheck-to-paycheck. If you are anything like me, you got pretty excited when you signed your first job offer letter. That yearly salary sounds like more money than you’ll ever need, until of course, you crunch the numbers and realize you have a discretionary budget of $12.50 per month.
So, where to start? Many well-known, financial advisors espouse the 50/30/20 budgeting method for millenials (like myself); however, I think this framework is awful. It breaks down like this: 50% of your take-home pay goes towards living essentials (rent, utilities, groceries & gas), 30% is allocated to lifestyle expenses (dining out & shopping for clothes, etc.), and here’s the kicker: only 20% goes towards the future (i.e. paying down debt, creating an emergency fund, & saving for retirement). Don’t get me wrong, if you don’t have any student loans, credit card debt, or insane housing costs, then this budget might be great, but it’s certainly not going to help those of us in debt, and it’s definitely not going to let you become a billionaire. Think of the 50/30/20 as the goal budget for after you’ve met your financial goals and want to splurge somewhat responsibly.
The Billionaire Budget:
What I’m suggesting is a little different. It’s more of a 55/30/10/5 plan. 55% of your take-home pay goes to necessary living expenses, like rent, gas, cell phone, etc. 30% of your money goes towards debt-repayment. 10% (or more, if you have less debt) is earmarked for savings – an emergency fund & retirement contribution before a nice vacation . Finally, 5% (or less if necessary) is fun money (go get that cocktail or mani/pedi!). I call this formula the Billionaire Budget (BB for short).
In my personal experience, BB helps remedy a few of my issues with the 50/30/20 plan. First, it takes into account that living expenses are just that, they are expensive! Second, it allows you to more aggressively pay down your debt. If you’ve got debt, especially on a credit card, you need to be aggressive at paying that off if you ever hope to reach billionaire status. Third, it prioritizes saving for the future over fun money…the opposite of which is simply irresponsible. Fourth and finally, it still gives you some wiggle room to have fun. The minimum for fun money really ought to be 5% because otherwise you risk binge spending after a few weeks of severe frugality (remember how much pizza you ate after completing your 7-day juice cleanse?).
The Billionaire Budget is what I use each month, and it works. With BB you can pay down your debt (eventually freeing up more money for savings and fun), save for the future (ahem, become a billionaire), and still live.
Now that you know all about the Billionaire Budget, let’s make one.
How to Build Your Billionaire Budget:
1. Figure out your take-home pay.
The first step to making your own BB is to determine your take-home pay, otherwise known as your after-tax income. Put simply, this is what gets deposited in your bank account on pay day. Add up your paychecks for the month (remember: just the number you actually get to keep) and write it down.
If you have more than one job, babysit on the side, or get a stipend from your school, be sure to include those numbers (or an average number) in this portion too.
Once you have these numbers, some simple math will tell you how much income you should put towards the BB.
You can figure out these numbers by using the following formulas:
- (take home pay) x .55 = fixed expenses
- (take home pay) x .30 = debt repayment
- (take home pay) x .10 = savings
- (take home pay) x .5 = fun money
For example, a person who makes $2000 a month would have $1100 for necessities, $600 for debt repayment, $200 for savings, and $100 for funsies.
2. Lock-down that spending.
Next, make a list of all of your expenses for the last month. Most people get a little scared when they get to this part because they know in the back of their minds that they spend a lot more than they earn each month.
Write down every single expense you had that month. Rent, food, cable, cell phone, Starbucks, and everything in between. Your expenses vary from one month to the next, which is why you’re going to learn to make a new budget every month. Focus on this one month in order to get a framework. As you’re writing down expenses, you should also categorize them as necessity, debt, saving, or fun.
At this point, I’m going to recommend a friendly little tool called Mint. This website/app makes tracking your purchases, categorizing them, AND creating an actual budget super easy. It’s also free, which is extremely important when trying to fix your finances. I’ve been using Mint for years and I can’t say enough good things, but there are a bunch of resources out there so find one that works for you. Mint even makes pretty charts and sends you happy e-mails when you meet your goals. Other options, besides an Excel spreadsheet, are Learnvest and You Need A Budget.
3. Zeroing Out Your Budget
The BB is a zero-sum budget, meaning every dollar has a place to go. The goal isn’t to have $500 extra each month…if this happens, then you need to find a place for that $500 (ahem, debt repayment or savings, etc.). In order to do this, it’s time to combine steps 1 and 2.
With your take-home pay as the total figure, write down your subtotals for each of the BB categories (necessities, debt repayment, savings, and fun). Now, using this formula, make your BB!
Take Home Pay – Fixed Expenses – Debt Repayment – Savings – Variable Expenses = Personal Spending Money
Start with what you absolutely have to pay in fixed expenses like rent, utilities, car payment etc. Then factor in your debt repayment and savings goals FIRST. Then break out the personal spending money based on what your needs are each month.
If you spend first and then assume you’ll make savings/debt payments at the end of the month with what is left over, you’ll be disappointed every time. It’s the golden rule of personal finance- PAY YOURSELF FIRST!
The end result needs to be $0, so if you end up in the negative or positive, it’s time to tinker.
If you aren’t saving any money right now, this would be a good time to look into opening a savings account with your bank (make sure it’s free & has a low/$0 minimum balance requirement!) so that you can start building that emergency fund.
Go ahead and set up automatic payments for those fixed costs now, like depositing your 10% savings into a savings account the day after each paycheck and submitting online debt payments for 30% of your budget (less if you’re lucky). By automating these payments (and making sure it’s after your paycheck has gone through), you’ll be less likely to notice the money is missing and start to feel comfortable spending less AND you’ll remove the risk of overdrawing your account or spending too much and not paying yourself first.
Now that you have a basic framework (the BB), you know your take-home pay, you know last month’s expenses, and you’ve set up your categories with your different estimated expenses, it’s time to tinker.
Certain costs can’t and won’t change, like rent. This makes it easy to figure out your housing costs each month. Similarly, some costs change but not by a whole lot, like cell phones, utilities, and transportation. Make sure that you’ve properly estimated all of your fixed costs and add them in. You should also put in any minimum payments, interest charges, and student loan payments to your budget.
Now, it’s time to crackdown on unnecessary spending. If you were negative on last month’s budget, take a look at where you spent most of that money and rework your numbers till you hit $0. If you went over $400 and spent $750 on eating out, then you know what to cut, but sometimes it’s not that easy. Look for monthly subscriptions, gym memberships you don’t use, and weekly nail salon trips. We might like having these things around, but trust me, getting rid of the debt is worth way more than dealing with chipped nails for a few days.
If you went negative because your rent is exorbitant or you don’t make a living wage, then the outlook is even worse. Your options are getting more roommates, moving somewhere even cheaper, picking up a 2nd or 3rd job, or joining one of those websites that sets you up with a sugar daddy. Working more than 1 job sucks, but remember, This Too Shall Pass. You’re going to sacrifice in the short-term for some major, long-term gains. Plus, if you pick a side-job with benefits you might get a free gym, free food, or free clothes out of the process.
On the flip-side, if you were positive on the month, then great job! You can either: a) increase debt payments to pay down debt faster; b) increase saving for an emergency fund, retirement, or something else; or c) increase your fun money. I recommend a healthy combo of all 3 options. However, the first priority is saving up an emergency fund of at least $2500 or 6-months’ expenses, whichever is more feasible.
Once you know your input, output, and parameters, the tinkering process can take a little while (read: I’ve been following this budget for a while and I’m still reigning in my food budget). But once you get in the habit of paying down debt, saving, and living (a little) each month, it definitely gets easier to be a Billionaire Budget diva.