Kyle and I are coming up on our first big financial transitions – something I’ve anticipated since the founding of this blog. I always thought that our post-PhD lives would offer an opportunity for lifestyle inflation, but instead I’m grateful that we live sufficiently below our means to absorb an income cut. This week, I have a new appreciation for our budgeting system and how clearly it delineates between wants and needs. On top of that, I am realizing that we live far enough below our means, even on our low income, that my impending unemployment is not going to be much of a blow.
We have what I call our everyday budget, which is our recurring monthly transfers (saving, giving) and expenses (rent, utilities, food). Then we have our targeted savings system in which we transfer a set amount of money every month to each of many savings accounts designated for specific purposes.
Our everyday budget is largely made up of needs and our percentage-based budgeting line items – only our restaurant eating (and maybe a bit of the grocery allocation) and the missionary we support are fully optional.
Our targeted savings, on the other hand, is largely discretionary “wants.” The only needs that we’re locked into that come out of those accounts are our auto and renter’s insurances. The other non-emergency needs like clothing can be deferred if we are tight on funds. Most of the overall targeted savings rate is really just pure “wants” like travel, entertainment, a DSLR, and our CSA. Plus, we have a lot of money built up in these various targeted savings accounts, so we could probably spend as normal without saving anything into them for quite a while.
So with those observations about our current budgeting system, it was easy to divide up the wants from the needs to create budgets for three scenarios come summer/fall, for after Kyle starts his new position:
- Scenario 1: Kyle and I are both employed by our university (me as a grad student, him as a postdoc)
- Scenario 2: Kyle is the only one bringing in an income
- Scenario 3: Kyle has his income plus I have some side hustle income
(These scenarios assume I don’t have a full-time job in Durham because I’m not applying for full-time jobs in Durham. If I’m employed I will be living in another city and that will be a completely different money management scenario and not really worth speculating about at this time.)
In the first scenario, which will last only 1-2 months, we will have a very nice income boost, which obviously will all go straight to savings to shore up for the subsequent months. No changes are necessary to our spending, only to our giving, saving, and taxes to keep the proper percentages for those.
In the scenarios 2 and 3, we’ll be dealing with an income drop and the extra expense of adding me to Kyle’s health insurance plan. Essentially, we’ll keep our everyday budget the same and stop saving to our targeted savings accounts individually (except for the rates for our insurance and estimated medical expenses) and just put whatever is left over each month into general savings. If we are truly in scenario 2 and not 3 (i.e. I can’t make any side income), we would consider dropping the missionary support and taking on a roommate. But I hope that I will be able to hustle up at least the difference between Kyle’s new income and our old combined income – or even more!
My estimate is that we’ll be able to cover our percentage-based giving and saving, all of our everyday budget, and the non-deferrable needs in our targeted savings rate on Kyle’s income alone, with a few hundred left over each month to go toward general savings. That’s because 1) Kyle’s raise is about 40% of my income, 2) we don’t spend anywhere near what we make on a monthly basis, and 3) our budget guides us to easily differentiate between wants and needs. We have the added security of what I consider to be plenty of money in our emergency fund, general savings account, and various targeted savings accounts. That really takes the pressure off of me to have to earn any self-employment income, though I certainly aspire to through freelancing or website income.
I could easily be freaking out about being removed from my advisor’s payroll so suddenly without sufficient free time to look for a job. Instead, thanks to our budgeting principles and Kyle’s new job offer, I am calm and confident.
How would your budget handle an income drop? Is it easy for you to tell wants from needs in your spending?
photo from Free Digital Photos