Start with saving; the spending will follow

By MP Dunleavey

Editor's note: Join columnist MP Dunleavey and a group of women as they seek to strip away the myths around money, liberate themselves from debt and find financial sanity. Follow the quest of the Women in Red every other Wednesday in Dunleavey's column on MSN Money.

Like everyone else, the Women in Red are working hard to gain control over their financial lives. And it's a muddy path we're on.

We make strides; we slip and fall. We soldier on. I keep waiting for everyone to quit, but we're making progress: digging out of debt, learning to invest for retirement, and breaking free of bad habits like overspending, impulse shopping and living a lifestyle we can't afford.

But the simple task of setting aside cash (and not spending it soon after) has proved to be quite a challenge.

A financial philosophy

If you've been keeping up with our financial adventures, you'll know that the gang has been working with a spending plan called the 60% Solution.

It's part budget and part financial philosophy, and it works like this:

• Keep your monthly committed expenses, including taxes, to 60% of your gross income.

• Save 10% for retirement and 10% for long-term expenses, such as a down payment, new car, major home repair or other big, infrequent purchase.

• Set aside an additional 10% for smaller, irregular expenses, such as a new appliance, minor home and car repairs, or a new battery for your laptop.

• Use the 10% left over for wild, crazy parties (or anything else that strikes your fancy).

The beauty of this system, in theory, is that it covers spending AND saving. But the trouble is, everyone in the group got stressed out about the idea of trying to pare down monthly spending commitments to 60%. That's not surprising, given that some of us were, until recently, spending more than 100% of our incomes and racking up debt.

Fantasy vs. reality

It's important to remember that the 60% number is just a target. It's an ideal number, something to strive for. We don't shoot you if your expenses hit 61%. Or even 70%.

Still, there's something about being told to live within limits that gets folks all riled up. Jill was so irate that she refused to even try it. (Of course, as a renter in Manhattan, her tax bite is so big that her $90,000 income shrinks to about $55,000 net, so she barely has 60% to start with.)

Others couldn't imagine keeping their expenses to a specific level every single month. Even when it looked possible on paper, life didn't cooperate.

For example: My husband and I are freelancers, so our income fluctuates, but our combined annual gross hovers at $70,000. Ideally, then, we should be able to cover all of our basic costs (mortgage, utilities, taxes, food, gas, etc.) with $42,000 -- or about $3,500 a month.

Then, with the remaining 40% (or $2,300 a month), we'd save $1,050 -- equally divided between retirement and long-term savings -- put another $575 aside for irregular expenses, and we'd still have $575 left over for fun. (If you're in debt, use 10% to 20% of your savings to pay that first -- and we are.)

The solution arrives

This seems reasonable, right? Even as I look at those numbers, I think: So why can't we keep our expenses in that range? Is life so expensive?

You (and Carole, Beth, Jill and Lyndsey) might say it is. But what makes people lose control financially, often, is when they don't have any money set aside for irregular expenses -- and that baby shower gift or TV repair goes on your credit card.

Then you cut back on your long-term savings to pay your credit card … and the spiral continues until you feel like there's nothing to save because you've already spent it all. Sound familiar?

Fortunately, Carole stumbled upon a way to reverse the quantum mechanics of the situation and give us a particle of hope.

A creative answer

As the head of a small but thriving not-for-profit agency, Carole is used to coming up with creative budget solutions. So she decided that instead of trying to make her spending fit the 60% rule, she would focus on savings.

Of her yearly income of $130,000, 10%, or $13,000 a year, went into her retirement account. Then she set up two additional savings accounts:

• One for her irregular expenses.

• The other to help her save for her big long-term goal: a down payment on a home.

If Carole had been glued to the 60% rules, she would have tried to salt away $1,083 a month (10% of her monthly gross) in each account. But instead she's saving what she can manage: $375 a month (3.5%) in each account, for $750 total savings.

Thus Carole is saving about 13.5% of her gross income, plus putting another 3.5% aside for irregular expenses.

A shift in focus

Could she be saving more? Probably. But I quickly realized that in an imperfect world, Carole had found an imperfect but excellent solution to the problem with spending limits: Save first!

It's a lot like the old personal-finance chestnut, "Pay yourself first," but I like it because it indirectly forces you to start spending less. And that's what we humans need.

After listening to Carole, I said: Forget trying to cut back my committed spending, which always gave me a gnawing feeling that felt like heartburn; I'll turn my attention to our savings. Couldn't my husband and I save more, even a little more? Yes -- if we saved first.

Continued: No more tightrope

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