36%: The Golden Cash Flow Ratio | Series 2.4

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Welcome to the Enjoy More 30s: Family Finance

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podcast, the only podcast dedicated to making life more

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enjoyable for young families by hitting on the financial topics

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that tend to weigh on us, stress us out and distract our focus

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from simply enjoying life.

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Welcome to the fourth episode in this "Your

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Money Multiplier" series, which is entitled "36%: The Golden

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Cash Flow Ratio". Today we're going to cover what you need to

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know when it comes to what a budgeting exercise should

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actually accomplish. And what you can do to perform your own

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in 15 minutes or less. Growing up, I was always a bit of a slim

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kid. And so when I got into high school with sports, and you

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know, just being honest, girls and everything else, I wanted to

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be bigger, more muscular like a lot of boys do. You would hear

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talk of eating this special diet or taking the supplement or

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whatever else. It was always a lot of work, took a lot of time,

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and at the end of the day was not sustainable long term. This

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is kind of how it is for anyone that has ever tried, you know, a

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diet or anything kind of in this realm. Most are too time

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consuming and complicated to maintain long term. At the end

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of the day, pretty much everyone can agree on a quick, simple,

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universal version. If you put lots of good stuff into your

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body, put as little bad stuff into your body as possible, and

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work out to some degree, you'll probably be in pretty good

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shape.

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What you need to know is that scary words like budgeting and

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cash flow work much the same way. The most logical way to

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approach it is to break down everything you have coming in,

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what you have going out, being meticulous down to the very

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penny. And the end result is that there's way too much work

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to maintain- every month is different. And then Christmas

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and a sick dog bill just kind of blow the whole thing up anyway.

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I'm here to tell you, though, that you don't need to do it

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this way. And maybe surprising to hear, but the goal is to not

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actually account for every penny when it comes to a budgeting

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exercise. It's to make sure you're living within your means

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and saving at least something towards yourself every month.

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What you can do to accomplish this is to utilize a 36% ratio.

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This is the same ratio that is incorporated into how a bank

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evaluates you for a mortgage. Our trademark tool, that we call

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Backdoor Budgeting, uses this same approach that we use in

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meetings with clients. So how it works is kind of like this. If

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you were to apply for a loan at a bank, they would focus on just

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36% of your gross, so pre tax, monthly income. The other 64%

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they would pretty much just ignore. They say that this is

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the portion of your income that goes to expenses everyone has.

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So think groceries, gas, cell phone, TV, stuff like that. For

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the 36%, they would focus on just the items that are specific

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to you- meaning some people have them and some people don't. Some

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people have a car loan, some people don't. Some people have a

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mortgage, some people rent, some people save into a work plan and

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some people don't. So basically, it includes your housing

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payment, mortgage with taxes and insurance or rent, loans and

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debts, think auto, student, or any credit cards that you carry

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forward month to month with partial payments, so if you

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don't pay your credit cards off every month, and then what you

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already save every month.

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So let me give you kind of a simplified example. If I make

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say $10,000 a month gross, so again, before taxes. Then 36%

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comes out to 3,600- 36% of 10,000 is 3,600. Pretty easy so

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far. This is the amount we're focusing on for 'specific to me'

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expenses. If I have a mortgage of $1,600 a month, and a car

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loan of $500 a month, I subtract those and now I'm down to $1,500

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a month- $3,600 minus $1,600 for the mortgage is $2,000. $2,000

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minus the $500 for the car loan is $1,500. Not too bad still

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right? If I save around $1,000 a month into my 401(k) already at

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work, now I take that $1,500, subtract that another $1,000 and

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I'm down to $500. So with no other loans, or unpaid credit

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cards that carry month to month, this is what I should have as a

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surplus. There it is. Done. You have a starting point. That took

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way less than 15 minutes actually.

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This can be used for a flexible investment account as described

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in the earlier "Like Super Gymnast Flexible" episode. It

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can be used for college savings, for a home improvement, or

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another home purchase account, for more retirement savings-

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anything. You now have a starting point. If you find this

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is too high or too low, you can just change it the next month,

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no problem. The hardest part, though, is now done for you. You

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have a starting point of what most people, most families in

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your situation, using that standard ratio, should be able

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to save additional. If the number comes out negative when

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you do this exercise, then I would not be surprised to hear

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that you have growing credit card balances and trouble paying

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everything month to month. This is your likely deficit that

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probably needs attention in that case. Now, you know, on this

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other hand, roughly how much you need to free up by lowering your

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savings, maybe refinancing. These parts may need an advisor

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to maybe give you the best course of approach for, but

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either way in way less than 15 minutes, you have a great idea

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of where you stand. It was quick, painless, and puts you in

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a position that you can take positive action. That's the most

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important part of all of this.

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So when we're talking about budgeting, you know, as kind of

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a recap for today, the first thing is to rethink the goal of

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scary words like budgeting. The goal is not to account for every

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penny, it is to make sure you're saving a good amount towards

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yourself and keeping within your means. That's it. Second, use

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this 36% ratio to quickly get an idea of where you stand. Gross,

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so pre tax income, minus those expenses that are specific to

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you, and any savings currently being done, and you're done with

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calculating a starting point. Third, take action. Make a

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conscious choice to now do something with that extra

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savings. Even if it's just, "I'm going to move it into this

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separate bank account every month to see if I can actually

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do this", even that is fine. Make some positive step forward

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as a first step. And if you're on the negative side, make sure

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to look at taking action to balance out your cash flow. If

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you have rising credit cards every month, decreasing bank

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account every month, that needs attention now. It is not going

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to fix itself, it will only get worse. It's never smart to save

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at the expense of mounting credit card debt. It's kind of

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like you know swimming backwards, so to speak. Put

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money into my 401(k) but I'm putting an equal amount onto my

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credit card because I can't live, that equation isn't going

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to balance out for you long term.

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So as always, if you are wanting help, please remember to check

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out the 'Ask Joe' section on the show's website- enjoy more 30s

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.com, that's enjoy more three zero s .com and thanks very much

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for tuning in today. Please remember if you enjoyed this

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episode, please make sure to subscribe and review us on Apple

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to find it, and hopefully help them in the ways that it's

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helping you. The next episode is titled "Stocks Lead, Don't

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Follow" where we will cover what typically makes the stock market

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react and the mistakes most investors make after the fact by

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trying to follow along. Thanks very much as always for

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connecting today and looking forward to doing so again soon.

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The conversations on this show are

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Joe's opinions and provided for general information purposes

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only. They do not constitute accounting, legal tax or other

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professional advice for your specific situation. You should

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registered investment advisor member FINRA/SIPC.