I always enjoy a good magic trick full of illusions meant to deceive our brains and entertain us. As you might have figured out from a few of my posts, I’m like scheming up plans to hiding money from myself through subtle life hacks like tax withholdings, multiple bank accounts, piggy banks, etc. Today, let’s apply some voodoo math (aka financial trickery) to the budget planning and hide money from ourselves in plain sight
When creating a budget, the standard process is to figure out how much money you need/want to spend over the course of a year for each category you’ve identified as essential. Once you have your yearly budget figured out, you know how much you can spend each month. From here I like to divide the monthly budget by 2 since I get paid bi-weekly. Once I know how much I need to deduct from each paycheck I automate my bank accounts to set aside this money from my paycheck as soon as the money is deposited.
Here’s an example: let’s say our take home paycheck after taxes is $65,000 a year, and we have a goal to save $24,000 a year and a budget for cost of living expenses of $36,000 a year. That leaves us with $5,000 a year in play money. We look at one of our paychecks and see that after taxes and other deductions our take home pay is $2,153.84. We’ll automatically put $1000 into savings a savings account ($24k / 12 /2 = $1000) and set $1500 aside to pay our monthly living expenses ($36k / 12 / 2 = $1500). The remainder will go into our “play fund” which can be used for whatever it is you feel like such as an emergency fund, investing, entertainment, toys, etc. This is the exact methodology I use to calculate how much money to tuck away from each paycheck every time I get paid.
Voila! That is it! Simple and easy as pie! So to review, figure out your monthly budget and divide by 2 and set aside that amount from each paycheck before touching your money. Paycheck – Savings Goals – Expense = Leftover Play Money.
I know I know I know you’re thinking what the heck is so special about that? Where’s the magic? Why is EQ claiming this to be a fancy innovative savings tools for my wealth building arsenal?
Let’s look at the illusion hidden in the math. First of all tell me how many weeks are in a month? Most people will say that there are 4 weeks in a month when asked this question. This is wrong! There are 52 weeks in a year and when divided by 12 months that comes out to an average of 4.3 weeks not 4 weeks per month! I run into this problem all the time with lazy financial analysts at work who like to use 4 weeks per month for estimating costs. Claiming there are 4 weeks in a month overstates your calculations by 8.3%. At work, I like to use this to my advantage to sneak money past the analysts and pad my budget for contingencies. In my personal life, I like to use the same trick to help me save extra money throughout the year. Look at the math another way, most people get paid every other week, and there are 52 weeks in a year, that comes out to 26 paychecks a year (52 / 2 = 26). In the scenario above we assumed 4 weeks in a month and we get paid every other week which gives us only 24 paychecks in a year (4 X 12 / 2 = 24), an understatement of 8.3% (24 / 26 = 8.3%).
Now let’s run through the above scenario again to look at how much we actually need to set aside from each paycheck to meet our objectives. The take-home pay for the year was $65,000 which we found to be $2,153.84 when we looked at the paycheck stubs, and we had a goal to save $24,000 a year or $923.07 every two weeks ($24,000 / 26 = $923.07) and a budget for cost of living of $36,000 a year or $1,384.61 every two weeks ($36,000 / 26 = $1,384.61).
Based on how we set up our automated bi-weekly budget up above we are setting aside $1000 from each paycheck into savings even though we only need to put away $923.07 to meet our goal at the end of the year. For cost of living, we are setting aside, $1,500 every paycheck but we only need $1,384.61. Between the two accounts, that’s an extra $192.30 in savings every paycheck or $5,000 a year! Cha! Ching! Cha! Ching!
There you have it folks the magic trick has been revealed! Are you game to try it out for yourself?
Feel free to share your thoughts.
Need help tracking with your budget and tracking your net worth? Check out Personal Capital and Mint to review your spending. The free Retirement Planning calculator and 401(k) Fee Analyzer tools at Personal Capital are also very useful. I learned that I was paying on my retirement accounts and was on track to give away over $426,692 in management fees over the next 30 years.