When I was living in the city and working late nights, it wasn’t uncommon that I would place a DoorDash order as I was leaving work so I could arrive home to my favorite Indian takeout. And when Brian, my now-husband, and I were dating, we would rarely brave our respective roommate-shared kitchens, so taking turns ordering delivery was common. Even though we thought we were ordering the best deals, cheapest food, and making sure not to get the “extras,” it was about $50 for every meal we shared. $50 + delivery fees and tips added up fast. We were each spending about $500 a month ($1,000 total). And on top of that, I was still buying groceries with all the ambitions of meal prepping (insert facepalm here).

When we finally moved in together that was the first habit we broke. We had our own kitchen, we had all the tools, and one of us was a professional chef. We could no longer live in denial that delivery was an extravagance. It’s not just food, it’s groceries, shipping, streaming, subscriptions, and service fees. It’s the $.99 here the $4.99 there and the 15% tip on top.

One example that really highlights what all these charges are worth is our HBO NOW subscription. We loved it for Game of Thrones, but now there is not a ton of value we get from it. Let’s say we took the $14.99 monthly charge and invested it in a Match-the-Market style stock with the average rate of return on 6% (the recommended calculation rate from NerdWallet.com). Over 30 years, we would have paid about $5,400 to HBO, or we could be looking at $15,000 in savings. And that’s just one subscription.

Take a look for yourself with this compound interest calculator. For those of you new to the idea of compound interest it is the principle of reinvesting the interest back into the principal amount which then can also accrue interest in the following period.

I am a firm believer that you get to spend your money however you want so I say this not to shame anyone, but to encourage you to take a moment and ask yourself if convenience is worth it for you. Is there something in your budget that would make a better investment than service? You’re going to have to pry Amazon Prime from my cold, dead hands (pays for itself in our household), but I make my own Indian Food now.

Habitual Heart is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.

The 50-20-30 Rule

The 50-20-30 rule is a great place to set benchmarks for your budget. The basics are splitting your income to spend 50% on essentials (housing, food, transportation, and clothing), 20% on financial goals like savings and debt repayment, and 30% on wants. Again, this is a great place to start. If you are only spending 30% on needs (go you!) you could choose to put that extra 20% towards rapidly paying off debts or saving for retirement or a 5-star vacation. There is a lot of flexibility in this model, but make sure you follow the order of essentials, savings, wants. If your needs are way over 50% that is when you need to be looking for ways to bring in additional income or lower your needed expenses. Check out my Habitual Heart 50/20/30 Budget Template on Etsy for these equations built right in.

• 50% on Essentials
  • Housing (Rent or Mortgage and insurances/taxes)
  • Utilities (Internet yes, Netflix no)
  • Groceries (food you need to live, not the splurges)
  • Transportation (car, fuel, insurance, public transportation)
  • Health (insurance and co-pay)
  • Clothing (shopping sprees not included)
• 20% Financial Goals
  • Debt (Credit Cards, Student Loans, etc. Mortgage and car payments included in Essentials)
  • Savings (401k, retirement, investments)
• 30% Wants
  • Dining Out
  • Entertainment (Netflix goes here)
  • Vacations
  • Toys
  • Treat Yo’ Self
  • Gifting

Take It A Step Further…

Housing = 30% or Less

Housing is the largest expense for most people so it makes sense there are a couple of rules set up just around keeping housing costs manageable. Keeping housing costs at or under 30% is actually important for a couple of reasons. First, it helps ensure that you can afford other essentials, savings, and needs when you keep your largest cost under control. Secondly, when you are applying for a loan, this is one of the factors loan officers look at. They will check to ensure your future mortgage (principal, interest, tax, and insurance payment) will not exceed 28% of your income. If you can manage to have your housing costs below 30%, more power to you!

Another rule of thumb for home buying is that you should always aim to be able to puy 20% or more down so you can avoid PMI (Private Mortgage Insurance). This is an extra fee you will pay as you are a greater risk without 20% down. Along the lines of not purchasing more home than you can afford, the total cost of your home should not be more than three times your annual income and ideally closer to two or two and a half.

Transportation = 15% or less

Transportation can be pricy and the cost doesn’t often slap us in the face, it creeps ups in little ways. When calculating transportation costs you should take into mind car payments, maintenance costs, fuel, insurance, parking, and public transportation. Using this percentage puts some guidelines on what kind of car payment you can afford.

Retirement – 10% or more

Most financial advisors recommend putting 10% of your total income towards retirement savings (in the form of 401k, IRAs, or individual taxable accounts.) Ideally, this savings starts at the beginning of your career or around your early 20s, but that is not always the case. If you are getting started later you will have to increase that savings rate to meet your retirement goal. That being said, ultimately a generalized goal is to have 20x your annual income saved for retirement.

Given that income changes throughout a career, there is another rule to consider based on your goal retirement lifestyle. Members of the F.I.R.E. (Financial Independence Retire Early) Community follow the “4% rule.” This rule is based on 50 years of historical stock and bond performance that has shown you can withdraw up to 4% of your investments a year without running out of money for at least 33 years. People in the F.I.R.E. community aggressively save to get to their retirement goal, sometimes saving up to 50% of their income or more. However, the 4% rule can work for anyone saving at any pace and it’s an easy number to calculate.

25 x Expected Annual Expenses = Retirement Goal

While the F.I.R.E. movement is not for everyone, it has yielded the formula showing your retirement goal should be 25x your expected annual expenses. Working off a number that does not vary as greatly as income seems a little more realistic and it’s also an important reason to always have a clear picture of your overall spending.

Designing Your Budget

The beauty of a budget is that you can design it to fit your life. The rules above are just guidelines, but if the most important thing to you is that you live in the big city, close to work and you would rather spend money on the perfect place to live over travel or going out that is 100% your call. Make your budget work for you.

Do you have budget tips you live by? Make sure to share in the comments!

Sink funds, not budgets! Unfortunately, your paycheck doesn’t just get bigger when you have a big expense due. You have to make the plan (aka the budget) to prepare for those months when your expenses might be bigger than your income. Sinking funds are a way to strategically put aside money in your budget for larger expected and unexpected costs. A common example is Christmas Gifts. We all know that Christmas is December 25 so no one should be surprised when December rolls around and suddenly we are spending more on Amazon than the typical month. A sinking fund makes sure these types of expenses have a place in our budget year-round. Sinking funds make sure your budget isn’t thrown for a loop and you feel prepared when those funds become due.

Why should you have sinking funds and not just savings?

Remember, a budget is what gives you permission to spend. If you just have a lump savings budget, there is nothing stopping you from spending it all on a luxe vacation even though your car insurance is due the very next month. A sinking fund will set up a protective dotted line that makes sure you spend on needs and wants accordingly. They should eliminate stress for large expenses and keep fun-spending fun.

How do sinking funds work?

Let’s use our example of a Christmas sinking fund and say we are starting our budget in January. Our goal is to have $2,000 set aside by November (when we start shopping). So, January – November = 11 Months. $2,000/11= $182 (rounded). In your budget, you are going to want to put aside $182 every month until you’re ready to shop in November.

What are some typical sinking funds?

Sinking funds come in different packages ranging from wants to needs and expected to not-so-expected. Here are some typical items you might want to work into your budget.

• Auto Maintenance
• Home Maintenance
• Medical Fund (Not to be confused with your Emergency Fund. Think of this as known upcoming costs like contacts, new glasses, braces, etc. Some people have this already created in the form of an FSA or HSA)
• Car Insurance
• Home/Renters Insurance
• Utilities (those pesky ones that are due every quarter or saving up for summer when the AC will be on overtime)
• Christmas/Holiday Gifts
• Birthday Gifts & Parties
• Pet Insurance & Medical
• Technology Replacement (new phones or computers)
• Yearly Subscriptions
• School (tuition, books, back-to-school supplies, and clothes)
• Kids (new baby, sports, clubs, classes, camp)
• Vacation (yay!)
• Taxes (April 15th)
• Bonus: Weddings! (Yours or others! Being a guest is expensive sometimes.)

Storing Sinking Funds

Sinking funds need to be in accounts that are readily accessible, unlike your Emergency Fund which should be a little harder to get to in a high-yield savings account. You can opt to create additional checking or savings accounts to help section off sums of money, but I recommend building your will power and budgeting expertise with most of the smaller funds. You should always be referencing your budget first for permission to spend, not your bank account. Download the Habitual Heary Zero-Based Budget Template and get started today. Alternatively, if you already feel comfortable with zero-based budgeting, I recommend YNAB for a great budget and sinking fund tracking app.

If you have any goals that require money (millennial trying to own a home over here!), you need a budget. If you have an income, you need a budget. If you have a bank account or a credit card, you need a budget. I firmly believe that everyone needs a budget, but I also believe that a budget does not control you. You control the budget and being in control should make you feel pretty dang good.

So what is a zero-based budget?

Income – Expense = 0

Simply put, when the money you bring in minus the money that goes out is equal to 0, that is a zero-based budget. At first that might sound terrible. “What? No money left at the end of the month?” you might say. However, I would say “All money was well spent.”

A zero-based budget is an intentional method of budgeting where all your money has a job to do. Jobs come in the form of paying the bills and buying groceries to fun jobs like date night and dog toys. Some of the most impactful jobs are debts and savings. These jobs attack what is weighing you down and prioritize building wealth. It gives you a plan and permission to spend money how you want to.

How does it work?

Again, the goal is to have all the money coming in – all the money going out = 0. There are five steps to getting there.

1. Income. List all your sources of income. Some incomes you might know exactly how much is coming in and some you might have to estimate based on your job type. Err on the side of caution if you are unsure.
2. Expenses. 
   • Required Expenses. Required expenses should be the things you can’t live without. For most people that is food, rent/mortgage, utilities, transportation, and basic clothing. I like to have the required expenses at the top of my budget for 2 reasons. First, if anything should happen to our income, it’s easy to see what we need to fund first and where we can cut from our budget. Second, you take the sum of your required expenses and multiply it by six months to get a comfortable emergency fund goal.
   • Other Monthly Expenses. Think subscriptions, eating out, entertainment, gyms, etc.
3. Goals.
   • Savings. Savings goals should be the bigger things like emergency funds, down payments, new cars or college.
   • Sinking Funds. I’m not exactly sure where sinking funds got their name, but I like to think of these as things that would sink your budget if you didn’t plan for them. They are things you know are coming, but often creep up on you like Christmas/Holidays/Birthdays, car registration and insurance, back-to-school, etc. For this group, take your savings goal and divide it by how many months until payment is due. Example: Start saving for the Holidays in January (Goal $1000/12= $84/month). It feels great to know you have the money on hand for any occasion. 
   • Debts. Just ew. But it’s going to feel so good to say goodbye to these.
4. Get this all to equal 0! This is the balancing part of the budget. If your budget is in the negative, you need to either find places to cut back or bring in more income. If your budget it positive, you need to find more jobs for that money.
5. Invest in the habit. It takes about three months to really get comfortable with a budget and have it working for you. There is trial and error in making a budget and it requires that you check in with honesty, but I think that is worth all your financial dreams coming true.

Tips on Getting Started

Let’s get pen to paper, or more realistically, keys to keyboard! There are a couple tools I recommend to get you started on the right foot. Get them in this order:

• Mint – This is a free tool from Intuit (makers of TurboTax and Quickbooks). They know a few things about finance so this is a great place to start. While this is not a zero-based budget platform, this is going to help you get honest and familiar with your spending habits as it automatically tracks and categorizes spending.
• Habitual Heart Zero-Based Budget Template! – You do not have to be an Excel wizard to enjoy the features I built into this template. It helps you create that zero balance, highlights overspending and keeps you on top of all your categories mentioned above. It also works on Google Sheets if you don’t have Excel. Give it a “favorite” on Etsy for a special 75% discount email. Just tap the little heart.
• You Need a Budget (YNAB) – When you are a zero-based budget master you can graduate to YNAB. This is a super powerful budgeting tool that comes at the price of $84/year. Try 34-days free with my link and see how it will pay for itself. They have cleverly built a huge community around the tool and like-minded budgeters that is as helpful as it is motivating.