My 50/35/15 Plan

[Mike Key]

So I have a simple plan that my wife and I put into effect after I read another post here a few months ago. We've had a 35% savings rate since getting married, but now I have a solid plan I intend on following for the next 15 years.



For the sake of easy peasy math, I am going to explain this starting at zero as as though today is day one, using our combined income after taxes rounded out. I will not factor in our current savings.



Total Income $135,000 = Year 1

• 50% Savings Rate
• 35% Fixed Living Expenses (All bills, insurance, gas and entertainment)
• 15% Flex Spending (for large purchases, ie new car, down payments, vacations, getting teeth pulled, etc)

At the end of Year 1


You will have $67,500 in savings


You will have $20,250 in flex spending account


Your budget will be limited to $47,250 for the year or $3937.50 per month to support yourself.


The hard part however is not adjusting your lifestyle, even evaluating to see if you're living on more lifestyle than you can afford while achieving this level of agressive wealth accumulation. You can scale this up or down depending on your comfort level.


In 5 years at this pace using my income level you will have saved $337,500 in the bank. Bam, you're a quarter million dollars richer.


In 10 years using my income level you will have $675,000 saved in the bank  (considering you make the same amount every year for the next 10 yrs and never spend more than your budget, this doesn't factor raises or investments or other income. Just if for the next 10 years, every day was the same.)


You can mix this up for your own income levels to see the results. I was inspired by another commentator who talked about working to save 1 million dollars, and Mr. Money Mustaches easy math to retirement.

We're using this for a two fold purpose. One for rapid wealth accumulation and the other for rapid savings for investing. (I actually have a break down for the 50% into various investments and cash).

If you earn $50,000 and you save 50% that'd be $25,000, however living on 35% of your income, or $17,500 a year or $1,458.00 per month might be tough, but it's not totally impossible. Just requires evaluating your lifestyle and willing sacrifices.

BTW this scaled better with increased income as apposed to decreased income.

Anyways, I just thought I'd share, get some feedback and thoughts.

[JohnGalt]

Do you plan on keeping the flex spending amounts permanently?  If so, then from a FI/RE perspective - it doesn't really matter how that money is split it out - you have a 50% savings rate and that money, eventually, needs to be able to cover the other 50% of your spending.  You're essentially saving 1 year of expenses every year in this scenario.

On the other hand - if you plan on dropping that flex spending as part of your FI/RE, then I could see something like this as a way to both save and live now with an eye towards living more frugally when it comes to FI/RE.  You're saving 1.4 years of expenses every year in this scenario which will get you to FI/RE much faster than the above.

[arebelspy]

Hey, Mike Key is back!

Hope the new job is treating you well.

I think the forums have become more extreme the last few months (trending from MMM to ERE), so I'd imagine you'll get offered some free face punches on a budget of $67,500 (counting fixed and flex spending) for two people.

I think this 50/35/15 plan is good for lower incomes.  As income scales up the latter two numbers should decrease while the first should increase, simply because you should spend close to the same amount, regardless of how much you make, and bank the extra.

Also your assumption is that dollars in 10 years is worth the same as dollars today, so even though you say it doesn't count investment income, it does count the savings being in an investment that at least keeps pace with inflation.

This calculator is a good one for what you are describing: http://networthify.com/earlyretirement

[Mike Key]

Hey, Mike Key is back!

Hope the new job is treating you well.

I think the forums have become more extreme the last few months (trending from MMM to ERE), so I'd imagine you'll get offered some free face punches on a budget of $67,500 (counting fixed and flex spending) for two people.

I just had this talk with a friend, and I left it out of this post like I did when I tried to explain it to him. Perhaps I shouldn't say 50% total cash, that will never bet inflation. But I do have a 25-15-15-35-10 plan for the 50% but then it just gets confusing trying to share the concept with everyone.

So maybe I need a better way of saying 50% towards savings/investing in various asset classes. Like MMM's recent post about the global economy and owning many pieces of it, not just all your eggs in one basket.

Do you plan on keeping the flex spending amounts permanently?  If so, then from a FI/RE perspective - it doesn't really matter how that money is split it out - you have a 50% savings rate and that money, eventually, needs to be able to cover the other 50% of your spending.  You're essentially saving 1 year of expenses every year in this scenario.

I want to say that as of now, our flex spending isn't for buying things like a new TV. It's for large purchases over $10,000 and maybe the yearly vacation. The primary focus there is to have down payments for Real Estate purchases, flex might be the wrong word.

As we have a misc. spending in our budget that comes out of our 35%. So maybe, fixed purchases of high volume? I don't know a better way of putting it.

It's something that may at some point just be added to the 50% factor.

I think this 50/35/15 plan is good for lower incomes.  As income scales up the latter two numbers should decrease while the first should increase, simply because you should spend close to the same amount, regardless of how much you make, and bank the extra.

I think you are right, however we don't have kids just yet, and I can see that meaning the monthly outgo might go up slightly. Hopefully we'll learn enough here that when that happens, it's very marginal.

When I said it doesn't count investment income, I just want to make the math and numbers clear enough to excite people. I have peeked a few friends interests who are now excited about trying to save, invest and be more frugal.

We just want to get thru year one, and then re-evaluate the plan. I'd prefer my wife to not be working after 2017.

[JohnGalt]

Do you plan on keeping the flex spending amounts permanently?  If so, then from a FI/RE perspective - it doesn't really matter how that money is split it out - you have a 50% savings rate and that money, eventually, needs to be able to cover the other 50% of your spending.  You're essentially saving 1 year of expenses every year in this scenario.

I want to say that as of now, our flex spending isn't for buying things like a new TV. It's for large purchases over $10,000 and maybe the yearly vacation. The primary focus there is to have down payments for Real Estate purchases, flex might be the wrong word.

As we have a misc. spending in our budget that comes out of our 35%. So maybe, fixed purchases of high volume? I don't know a better way of putting it.

It's something that may at some point just be added to the 50% factor.

I guess my point wasn't really about what you call it or what you actually spend that 15% on.  The point is to know whether or not it is spending you will continue post FI/RE so that you know how much you need to cover with investment income.

[Mike Key]

I guess my point wasn't really about what you call it or what you actually spend that 15% on.  The point is to know whether or not it is spending you will continue post FI/RE so that you know how much you need to cover with investment income.

No it will not be continuing past 10yrs. It may not even be totally spent each year.

[JohnGalt]

I guess my point wasn't really about what you call it or what you actually spend that 15% on.  The point is to know whether or not it is spending you will continue post FI/RE so that you know how much you need to cover with investment income.

No it will not be continuing past 10yrs. It may not even be totally spent each year.

In that case... I like the approach.  In fact - it's pretty similar to my current approach - though I haven't explicitly defined percentages for each category.  I just have a set of core living expenses ($1,500 - $2,000 / mo) that I'd like to cover to consider myself FI enough to be able to survive without any job income.  I spend more than that each month - but also save more than that as well. 

That said - I do feel like I should spend a couple years actually fully living at that core level - just to make sure I am both capable and comfortable with it - before actually declaring myself FI. 

[Mike Key]

Ok, I guess the reality is I have a 65/35 plan. If I'm investing in real estate whats the point of calling it 15% flex spending, when it's no different then buying an index fund for example out of the 50% money?

:) here I thought I was a genius.

[Bakari]

however living on 35% of your income, or $17,500 a year or $1,458.00 per month might be tough, but it's not totally impossible.

lol.

According to Mint I spent $15,580.91 over the last 12 months - and that's including business expenses and a slightly obsessive hobby of mileage enhancing truck mods (my single highest spending category, probably much more than I'll ever get back in fuel savings!).
Take those out and I'm living on less than $12,000. 

Granted, on the one hand, I do live in a trailer.  On the other hand, I live in the SF Bay Area, which is (supposedly?) the most expensive housing market in the world.

And the funny thing is, I think this is probably the most I've ever lived on.  I feel very very comfortable.  Spoiled even.  I don't know what else I would ask for.

On the other hand, this does serve to remind me that I need to focus on higher income if I'm serious about ever reaching FI

[grantmeaname]

lol.

My thoughts exactly.

According to Mint I spent $15,580.91 over the last 12 months - and that's including business expenses and a slightly obsessive hobby of mileage enhancing truck mods (my single highest spending category, probably much more than I'll ever get back in fuel savings!).
Take those out and I'm living on less than $12,000.

I live on just under $800 a month, but I'm still on my parents health and auto insurance (hooray for being a college kid). With those costs added in I'd probably be just about where you are. Then again, Americorps members only make $12.1k a year, so it's not like my savings rate is really impressive.

[arebelspy]

The wife and I spent 21k in 2011, and that's for 2 people. 17.5k for one seems reasonable (i.e. 3.5k for the second person).

And we have a lavish lifestyle with vacations, iPhone and iPad, motorcycles, good food, etc. etc.

It does totally depend on the COL in your area, but that should change it maybe 25% or so, IMO (as you should compensate for that).

We don't watch our spending at all (and when typing this just went to confirm that with the wife and talked about the definition of watch your spending).  We could definitely shave multiple thousands from our budget.

[menorman]

lol.

My thoughts exactly.

According to Mint I spent $15,580.91 over the last 12 months - and that's including business expenses and a slightly obsessive hobby of mileage enhancing truck mods (my single highest spending category, probably much more than I'll ever get back in fuel savings!).
Take those out and I'm living on less than $12,000.

I live on just under $800 a month, but I'm still on my parents health and auto insurance (hooray for being a college kid). With those costs added in I'd probably be just about where you are. Then again, Americorps members only make $12.1k a year, so it's not like my savings rate is really impressive.

Not to make this markedly political, but hooray for the healthcare bill. Thanks to it, it now does not matter what you do with your life up until the age of 26. You continue to be eligible to stay on your parents' plan until then no matter what. Even if you graduate college, get married, etc. Naturally, that can be a massive benefit for a youngster looking to save money, even if they have to pay their parents for part of the premiums.

[ShanghaiStashing]

Interesting thought, it definitely is more of a 65/35 plan.

The most eye-opening part of moustachianism and ERE for me was two notions:

1. The only variable that matters is your spending when calculating retirement
2. Spending does not change with income increases

Quite honestly, I had always assumed that I would effectively just continue to spend more money as I made more money and therefore I would be 'more well off'. Once I realized that buying more shit doesn't make me happier, and in fact buying a lot less shit makes me a lot happier then I was hooked.

The 4K / month figure is interesting to me for the following reasons:
1. Net of housing I spend ~$1500 / month to support myself and my girlfriend in Shanghai (arguably one of the 15-20 most expensive cities in the world for most discretionary items, and food staples)
2. I'm not sure where else that money needs to go to if your housing costs are so low