By Simon J. Lau, CFA
Financial model: Please feel free to make a copy of this model by clicking on the hyperlink and selecting “File” => “Make a Copy.” You can then customize it to suit your specific needs.
Mastering Budgeting and Savings: A Practical Guide for Couples
Since sharing my article from last week, Joint Accounts: Harmony or Headache?, several people have asked me how I carry out our annual budgeting and savings exercise. To illustrate this process, I’ve shared a case example below. This includes a financial model similar to the one that we use, which you can copy, edit, and customize for your specific situation.
I’ll be the first to admit that there are more detailed tools available, but I built this tool specifically because it’s easy to use and provides us with the essential information we need to budget for fixed costs, savings, and discretionary spending.
Case Study
Sam and Sarah, a newly married couple, live together in San Francisco and have decided this year to be more disciplined with their budgeting and savings. To achieve their lofty financial goals, they’ve settled on our Budgeting & Savings tool to help them.
Sam, 35 years old, is an Engineering Manager at a Series C startup, where he earns $250,000 annually. Although he has equity in the startup, it remains illiquid. Sarah, 33 years old, is a nurse at UCSF, where she makes nearly $200,000 annually with overtime. Besides their full-time jobs, they do not generate any additional income.
Sam and Sarah own a condo in San Francisco, which they purchased several years ago when interest rates were low. They pay $4,100 per month for the mortgage and an additional $1,000 per month for HOA fees. Their other housing expenses include approximately $100 per month for utilities and $50 per month for insurance. Since they live in California, property taxes are due twice a year, in April and December. For 2024, they owe $8,000 for each period, or $16,000 for the year.
Besides housing, their monthly living expenses include $1,000 for groceries and dining out and $250 for costs associated with their shared 4Runner and their 3-year-old tri-colored American Bully named Barry. Sam and Sarah plan to have kids sometime in the future, but not now. In the meantime, Barry occupies much of their free time.
Sam and Sarah have always managed their finances through individual accounts and have no plans to open a joint account. Since Sam earns more than Sarah, they’ve agreed to split the fixed costs 60/40, with Sam paying 60% and Sarah covering the remaining 40%. To simplify these monthly expenses, Sarah transfers the estimated monthly amount to Sam each month, and Sam is responsible for paying these expenses on an ongoing basis.
The total fixed monthly costs amount to $6,500, with Sam’s share being $3,900 and Sarah’s share being $2,600. These fixed expenses increase in April and December to account for property taxes, adding an extra $8,000 to their total fixed expenses in each of those months. In total, their 2024 annual fixed cost expenses (not including taxes) are forecasted to be $94,000.
To ensure that they are saving enough for retirement, Sam and Sarah have decided to max out their 401(k) contributions. Sam’s employer matches up to 3% of his income, while Sarah’s employer, UCSF, matches a generous 8%. In addition to their 401(k) contributions, Sam and Sarah also max out their Roth IRA conversion contributions, with a limit of $7,000 each. Besides their retirement accounts, Sam saves an additional $750 per week into his brokerage account, and Sarah saves $500 per week into hers. They invest these amounts into Vanguard’s Target Retirement 2055 Fund (VFFVX), a low-cost target date fund, and treat these funds like their retirement savings, buying and holding them for the long term.
In this model, the savings amounts (including 401(k)) and discretionary incomes are shared in after-tax figures to normalize these cash flows. Based on these figures, Sam and Sarah save and invest nearly $120,000 in after-tax income. At this pace, they’ll achieve a 40% net savings rate (post-tax), or a 27% gross savings rate (pre-tax).
Finally, this leaves Sam and Sarah $104,000 between the two of them to spend on discretionary items (e.g., vacations, online purchases, etc.). On a monthly basis, this translates into $4,000 to $4,500 per person.
Summary
Sam and Sarah have created a clear and manageable financial plan. They’ve forecasted their combined incomes, fixed costs, discretionary spending, and savings, ensuring that they stay on top of their shared finances. By providing a structured approach to budgeting, they can easily identify areas where they can cut costs and allocate funds more effectively. This approach can also be easily adapted by others to plan their family finances, providing a balanced strategy for managing expenses and achieving shared financial goals.
Disclaimer: The information provided is for informational purposes only and does not constitute financial, legal, medical, or professional advice. Users should consult qualified professionals for advice tailored to their specific needs. The author and publisher are not responsible for any errors, omissions, or damages arising from the use of this information. By using this content, you agree to hold the author and publisher harmless from any claims or liabilities.
