While some people define disposable income as the money they have left over to spend, Portia and Kyron Jackson define it as the money they have to save.
For the Los Angeles-based couple, saving is not just about putting something away for a rainy day. It’s a recipe for building wealth for themselves and their 8-month-old daughter, Johannah Grace. In addition to saving 15% of their income for retirement, they have stocked up $24,000 in an emergency fund–enough for six months of living expenses. “We also save 10% in an ING account for additional investments such as entrepreneurial endeavors,†says 30-year-old Portia, who is an aerospace engineer. The couple has plans of buying a franchise or rental property in the near future to provide them with passive income.
But strategic saving hasn’t always been a top priority for the Jacksons. Before the couple got married in April of 2011, Portia was barely making ends meet in graduate school. “I didn’t have too much to save, but what little I did have, I just threw into a savings account and didn’t think of it,†she says. Kyron, who is 36, had even less of a savings strategy: he kept all of the money he earned as a human resources information systems manager in a non-interest-bearing checking account.
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After studiously reading an array of money management books, Portia, who after graduating started earning approximately $100,000 a year, knew it was time to take charge of her wayward personal finances. She first built a “mini-emergency fund†of $1,000 and then tackled her $35,000 student loan debt. With payments of around $2,100 a month, she paid off the balance in 16 months. She cut back on her spending by living in an inexpensive apartment, sticking to a fixed budget for going out, and searching for cheaper travel when visiting family.
Proud of her progress, she also shared her financial success with her then-boyfriend, Kyron. Since he had a salary in the low $100,000 it would be nothing for him to go out to dinner with four or five friends and foot the bill. He also had nearly $30,000 in student loan, car, and credit card debt despite the fact that he had about $30,000 sitting unused in his checking account.
Portia convinced Kyron to
keep about $1,000 in an emergency fund and use the rest of the money to pay off his debts. While Kyron was nervous at first about draining his checking account, he quickly saw the wisdom in that approach. “In the past, my entertainment budget was whatever was left over at the end of the day,†he says. “But now, what’s left over goes to saving.†A little more than a year later, he has re-saved that $30,000, “and I have no debt,†he adds.(Continued on next page)
Today the couple saves 15% of their income toward retirement between two separate Roth IRAs, Kyron’s 401(k) plan, and Portia’s 403(b) plan, and have approximately $100,000 combined. Kyron receives an additional 6% match from his employer, and Portia gets a 4% contribution from her employer. “We also trade options to build up additional capital for purchasing passive income investments,†Portia says. They sock away another 5% in an ING account for expenses that don’t fall into the day-to-day budget but aren’t emergencies either, such as cash for minor car repairs. Then they create small savings accounts for minor goals, such as one for travel expenses and another for classes Portia is taking to become a financial planner. “This is money that is being saved to be spent,†Portia explains.
While allotting money to so many different accounts might seem confusing, “it’s easier to see that we have X amount for travel or we can spend this much on an investment,†Portia says. She keeps track of it all in a spreadsheet. “We know the maximum that we can spend for any of those categories as opposed to having it all in one bucket and then trying to mentally figure out what happens if the car breaks down,†she adds.
HOW THEY DID IT
Put a plan in writing. Money is an emotional topic, but by laying the numbers out of how much Kyron would have if he paid off his debts and how much the couple could save over a year’s time, the process was much easier. Portia and Kyron depend on a simple Microsoft Excel spreadsheet. “When I saw it in the spreadsheet and the numbers made sense, I could deal with it logically,†Kyron says. While a financial adviser handles their retirement accounts, the couple decided on their own how much they would allot to their other financial priorities.
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Have an accountability partner. Portia says she and her husband have always been natural savers, but it helped to tackle their larger financial goals together. “Just having someone there who understands what you’ve been going through makes a difference,†says Portia. In order for an accountability system to work, both parties need to be involved in the goal-setting process, determining together, for example, a time frame for achieving specific savings goals. The couple has monthly meetings to discuss their finances and make sure they are on track to achieve those goals.
Add fun to the mix. Though most of their disposable cash goes toward savings, Portia and Kyron say they would have blown their budgets if they didn’t have money allotted for fun, so they also have a line item in the budget for entertainment. As an alternative to an expensive night out, they may have friends over for a game night or do free activities on the beach. They also have an item in their budget for date night.