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2 Dec 2013

Which of your budget categories would you "sell" for $2 Million?

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by Jesse Mecham

magnifying glassHere we have “Carrie.”

Carrie’s in her 20’s, recently graduated from college and working in tech marketing in San Francisco.

She bought YNAB during the still-running Black Friday sale and quickly figured out we like to review budgets around here.

Her preface, followed by her budget:

“I’m 24 years old, currently making $64,500 as a marketing coordinator for a tech company. My take-home pay is $1,662 on a biweekly basis.

These are my financial goals:

1. Increase savings to $10k to cover 3 months of expenses. Savings account currently has a buffer of $3,000 and I automatically transfer $200 a month.

2. Upgrade my car. I’m driving a 1998 Ford Mustang with 155,000 miles and I’d like to buy a newer used car within the next year. Right now my parents are paying my car insurance, but I’ll take on that expense with the new car.

3. Pay off my student loan, which was originally $8,113 and is now around $5,500 after a year of making double the minimum payments and applying $1,000 from my tax refund.

4. Increase retirement savings, which is currently 4% of my pay with a company match up to 15%.

5. Start investing in the mutual fund my parents started for me. Balance is about $1,800 and minimum investment is $100/month.

I don’t know how I’m going to be able to afford paying a car loan, car insurance, my student loan, and still having enough for savings and investing! Help!”

The Budget

Debt
Credit Card Debt $0 $0
Student Loans $200 $5,500 at 6%. $200 Original was $8,113, started payment Jan 2013, doubling the minimum.
Monthly Bills
Rent $1720 1 bd. apt. in the CA bay area. An astronomical cost but I’m not interested in moving or roommates.
Utilities $50 Includes water, trash, sewage
PG&E $30
Cable/internet $100 Currently doesn’t include HBO, but will probably renew for “Game of Thrones”
Cell Phone $30 Still on parents’ plan
Everyday Expenses
Groceries $100
Restaurants $100
Gas $200 Usually drive 300 miles round-trip once a month to visit family
Health/fitness $100 Pharmacy, fitness classes
Shopping $200 Mostly clothing, some household items
Personal Care $50 Beauty, nails, massage, dry cleaning, etc.
Entertainment $50 Music, movies, magazines, etc.
Gifts $50
Extra spending $100 Had a “cash” category in Mint, but now I’m planning on better monitoring this spending
Insurance
Health $0 Free through employer plan
Car $0 Only expense parents still paying, but will stop when I buy a new car
AAA $10 $10
Renter’s $20
Savings
Savings $200 Current balance is $3,000
TOTAL $3,310 $3310

Carrie, welcome to YNAB. You’re in the right place.

Congratulations on:

The best I can hope to accomplish with one blog post is to give you some serious food for thought.

You are the rarest of breeds in the United States: very young, very little debt, excellent earnings. If you’ll forgive the analogy: you’re a small car with a big engine.

Check out this math:

Monthly Retirement Contribution Return 30 Year Value 40 Year Value
$500 7% $609,993.61 $1,312,423.01
$500 9% $915,386.47 $2,340,696.25

I don’t give you that table just to prove how skilled I am in the copying and pasting of data from online savings calculators.

I just wanted to show you that you’re in the position to make the most important financial decision of your life without any of the baggage most of us carry.

You can flip one switch (deciding to set aside $500 per month) and be done with the biggest question burdening earners the world over: how will I be able to retire?

Rather than beat up on your individual categories, I’ll ask you to see which of these statements feels most comfortable to you:

I don’t know how I’m going to retire, but thank goodness I didn’t have any roommates in my early 20s.

I don’t know how I’m going to retire, but Game of Thrones was worth every penny.

I don’t know how I’m going to retire, but thank goodness I financed that new car 30 years ago when I already had one that worked.

That may have come across sarcastic or judgmental. It wasn’t. I’m just trying to put words to the harsh, relentless cost of not saving.

I recently had to evaluate a similar statement:

“I don’t know how I’m going to retire, but thank goodness I can do heavy squats in my garage.”

I couldn’t stomach that statement, so the cash I was going to spend on gym equipment went to pay off debt.

So, Carrie, my only advice to you is to walk through your budget and with each category, say, “I’d rather have this thing than $2 million.”

I hope you’ll be smarter than the rest of us. I hope you’ll decide to put a big, fat monthly 401k contribution on auto-pilot and build the rest of your life around your expectation of a comfortable, worry-free retirement.

Which reminds me – my calculations don’t even account for your employer match. For however long you’re with that particular employer – or one similarly generous – $500 is actually $1,000.

Forgive me for mostly ignoring your questions (and categories) to focus on your retirement math.

If you force big retirement savings into your life, then (as Metallica so eloquently put it) nothing else matters.

Your Next Step

Remember, budgeting is not restrictive. You won’t be spending less, you’ll be spending right. You can do this! Today. Right now. What do you have to lose? Except all that debt and stress. (Ok, so kind of a lot.)

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