In our goal to improve how much money we are saving and investing, I became interested in how much of our discretionary income was being spent wisely. In case you don’t know, discretionary income is the money that is left over after you pay taxes and living expenses. I decided to call the wise money that we spend, “Responsible Dollars”.
To calculate the amount of responsible dollars we spend, I first need to figure out how much discretionary income we have each year. To do that, I subtracted annual taxes and our annual living expenses from our total annual income. The numbers come out like this:
- Total Annual Income (after taxes & rounded) – $130,400
- Annual Living Expenses (rounded) – $48,000
- Discretionary Income per Year – $82,400
$130,400 – $48,000 = $82,400
I have to admit, after seeing how much discretionary income we have every year, I was shocked. It really doesn’t feel like we have that much money “laying around”, my gut reaction was shame; “WHERE IS ALL OF THAT MONEY?” We should be like Scrooge McDuck skiing in a room filled with money when we have THAT much discretionary income every year.
I felt a little better after adding up the responsible dollars we will spend this year. The reason it doesn’t feel like we have a pile of money laying around is because almost all of our responsible dollars spent are automated, we never see most of that $82,400.
Before I get into how many responsible dollars we spend, I should first say that I consider a responsible dollar to be money devoted to:
- Savings accounts
- Retirement accounts
- Education funds
- Extra loan payments (not including credit cards)
With that out of the way, here are the responsible dollars we are budgeting for 2019:
- 401k – $19,000 (contribution limit)
- Extra Loan Payments – $12,870 (13 extra payments on our HEL)
- Roth IRAs – $12,000 (contribution limit)
- Charity – $9,440
- Savings – $9,170
- College Funds – $5,170 ($4,000 of that in 1 time contributions)
Our Responsible Dollars Planned in 2019 – $67,650
Next, to calculate the responsible dollars rate, we need to divide the responsible dollar amount by the discretionary spending. After we complete that bit of math, we come up with responsible dollar spending rate of 82.1%.
($67,650 / $82,400) x 100 = 82.1%
So, for every $1 we earn in discretionary spending, $0.82 is spent responsibly. I’m surprised how high our rate of responsible dollars actually is.
What is your Responsible Dollars Rate?
If you strictly adhere to the 50/30/20 Budget, your responsible dollar percentage could be around 40%. Although the exact percentage could vary based on a lot of personal factors. For someone just getting into personal finances, I think 40% is a good goal to strive for. But there is potential to improve, and if we are able to hit 80%, I guarantee many people in the FIRE community are above 90 and 95% responsible dollar rates.
The Perfect Responsible Dollar Rate
I thought about coming up with a catchy chart that gives you a grade based on what your responsible dollar rate is. Maybe says you’re “Beast Mode” if you’re above 90%… But I just don’t think that’s what this exercise should be about. If you’ve read many of my posts, you know that I’m all about knowing yourself and your money habits. The most important thing you can do for yourself is have the knowledge of where you stand.
If you are at a 20% responsible dollar rate, are financially secure, saving enough for retirement, and happy with your level of giving, then 20% might be perfect for you. If you are at an 80% responsible dollar rate but know you aren’t saving enough to achieve the retirement you want for yourself, take a close look at the 20% and see how you can improve. The more you know about yourself, the more control you have over your financial future.
What about those “Irresponsible Dollars”?
Personally, I’m proud of our 82% rate. But, I’d love to see how far we can stretch ourselves. We end up with roughly $14,750 “irresponsible” dollars spent per year. That is a lot of money that we may not be allocating effectively. But, at least, we now know that we have about 18% of our discretionary income to work on optimizing. After I dig in deeper, I expect we make some stepping stone goals to increase our percentage of responsible dollars we spend every year. If we increase to an 85% responsible dollar rate, we could have an extra $162,000 in 25 years if we invest the difference.
What if we followed the 50/30/20 budget?
I think the 50/30/20 Budget is a great place to start if someone is new to personal finance and budgeting their money. However, I think that it falls short in allowing people to retire the way they probably imagine it for themselves. If we followed the 50/30/20 budget, our spending would look like this:
- Living Expenses (the 50) – $65,200 (compared to $48,000 actual)
- Discretionary Income – $65,200 (compared to $82,400 actual)
- Irresponsible Dollars (the 30) – $39,120 (compared to $14,750 actual)
- Responsible Dollars (the 20) – $26,080 (compared to $67,650 actual)
Lets take it a step further. We currently use 45.8% of our responsible dollars for our retirement accounts ($31,000/year). Using that same rate (45.8%), if we utilized the 50/30/20 plan, we would only save $11,950 per year for retirement – not even fully funding our Roth IRAs. At that savings rate, we would never be able to achieve the retirement we are planning. Based on last month’s net worth update numbers, in 2030 we would be $400,000 short of our $1,000,000 retirement account goal. In fact, it would take an extra 7 years for us to reach the $1M goal. As far as our $3.6M nest egg and retirement target in 25 years, you can forget about that. We would need an extra 9 years to get there. We would have lost an entire decade of retirement and vacation while we were still relatively young.
A Humbling Exercise
After these little calculations, I still reflect on how fortunate we are at this point in our lives. Even if we switched to the 50/30/20 budget (gasp), we would still have a ~$2M retirement account when we hit our mid-50s. Certainly enough money for us to retire very comfortably; withdrawing between $60,000 and $80,000 safely and (probably) never running out of money. So many people have less, we are grateful for what we have.
Eventually, I plan on looking deeper into how we spend that ‘irresponsible’ $14,750 and see what improvements we can make to put more of that money into the responsible dollar pool. Because before we know it, 4,084 days will pass and our deadline to hit a $1M retirement account will be here. Hopefully, we don’t look back and wish we had spent more of our income responsibly.