Adding Bubbles to your Bathtub
Last time I introduced the idea of stashing money in your bathtub. If that doesn't sound perfectly reasonable to you then I invite you to click the link and read the earlier article: Spend Yourself Wealthy Now, it's time to add "bubble bath" to your bathtub. As you recall you are saving AT LEAST 30% in your bathtub. But, there are a lot of demands on this saved money so we need a way to categorize what and how much of this savings you can use, and for what. First, a quick refresher of the 60/20/10/10 rule. You are living off of 60% of your net income. 20% is being saved, 10% invested, and 10% for charitable contributions. The +30% that is going into your bathtub is the combination of savings (20%) and investing (10%) because the bathtub represents your cash net worth. Also, that 20% savings is a "fluid" amount (no pun intended). In the beginning you will be saving 30%, soon you will start investing (10%) into retirement accounts, and eventually you will be investing into a variety of accounts at the rate of 20% and saving only 10% for major purchases. Bubble Bath The bubbles represent the different "budgets" or categories that you are putting your +30% into. For starters, you should establish an Emergency Fund account. At first, this "bubble" will consume all +30% of your Net Income (N.I.). Once your Emergency Fund bubble is fully funded ($1,000) then you can work on your next "bubble," Moving Out Expenses (transportation, first/last month's rent, security deposit, furnishings). This bubble will also consume all +30% of your N.I.
The next "bubble" to be created is your Retirement account. This "bubble" will account for +10% of your N.I. leaving 20% for other bubbles. This is where the "fun" begins. Unlike children who like to pop bubbles, we want our bubbles to get as big as possible; then, when you do finally pop them it will be awesome. So, here are some examples of other "bubbles" that you can grow with your +20%.
Emergency Fund ~ $1,000 + (as your standard of living rises so too should this amount)
Moving Out Expenses
3-6 Months Expenses ~ Less risky job = 3 months; more risky job = 6+ months
House Down-payment
Car (purchase/down-payment)
Home Furnishings
Wedding Ring/Honeymoon
Vacation
Religious Service/Mission
Birthday/Holiday Gift purchases
College Savings
New Technology (phone/computer replacements)
Etc.
You can have as few or as many bubbles as you wish. With fewer bubbles each bubble will grow faster. Have lots of bubbles (at the same time) and their growth may become agonizingly slow. Here again, delayed gratification will help you be successful as you will have fewer bubbles and can watch them grow really fast. Then, when the time comes and you have a nice big vacation bubble to "pop" that will be even more fun than popping bubbles as a kid. As for the Investment percentage it too can be divided into various "bubbles" such as: Retirement ~ (401k, Roth IRA, Mutual Funds) Investments ~ (stocks, bonds, funds, trusts) Real Estate/Land Jewelry/Precious Metals Just make sure that as your income increases and your 10-20% investing percentage grows, you need to have a fully funded 401k (if it's matched by your employer) and a fully funded RothIRA before you use the extra dollar amounts on individual stocks and real estate purchases.
Questions:
1. What are some bubbles you would like to work on right now?
2. Why should some bubbles grow faster than others? Which bubbles should have priority (grow faster)?
3. Create a simple visual aid that shows how your 30% would be allocated between Savings and Investing at different stages of life (Now, College, Mid-life, Pre-Retirement)
Resources: