Money is a deeply personal and sensitive topic for most people. We all view it differently, respond to it differently and we all have different expectations of how much of it we should have. Regardless of how much money a person makes or has, we all have the ability to live to the edge of our means. It’s important to understand that this doesn’t have to be the case. With a bit of planning, budgeting, patience, and a lot of willpower, you can achieve your financial goals.
Money Management 101
Creating a financial plan is going to be your biggest priority. There are different budgeting plans out there, but the one I recommend is the 50/30/20 rule. The idea of this budgeting plan is that you will break up your after-tax income into three different buckets. The first bucket allocates 50% of your income to your needs, the second bucket allocates 30% to your wants and the final bucket allocates 20% of your income for debt repayment and savings.
Steps to Accomplishing Your Goals
Determine Your After-Tax Income
Your first step is to determine your after-tax income. To do this you are going to need to grab your most recent pay stub. If you have no deductions coming out of your check, your typical weekly or biweekly check is going to be the number that you use. If you have automatic deductions, such as insurance or 401(k) deductions, you are going to have to add those back into your check total. Once you have your total monthly after-tax pay, we can move onto what falls into what category.
Money for Your Needs
The first bucket is all about your needs. This bucket allocates 50% of your after-tax income to cover your needs. These needs include:
- Child Care
- Insurance (Health, Home and Auto)
This bucket is where the bulk of your after-tax income goes. If your current situation calls for more than 50% to fulfill your needs bucket, then you have some options. You can limit or change some of your needs to fall into that 50% bucket. There is a long list of possibilities for limiting your or adjusting your needs, but examples would include trading in a car for a smaller car payment, downsizing your home, or even different child care options. Your other option is to stay with what you currently have and take it from your wants category. Life is all about give and take and the beauty of this system is its flexibility.
Money for Your Wants
Be careful when budgeting for this category. Usually, there are many aspects of life that feel like a need but are actually wants. The easiest way to determine the difference between the two is to look at your needs as your everyday necessities. If it isn’t absolutely necessary to have, then it is a want.
You will also have to determine a need vs a want within specific categories. For example, groceries are a need, but you will have to decide if buying organic is a need or a want. These are the difficult choices that you have to make in order to be successful with this system. Typical wants include:
- Dining out
- Streaming Services (Netflix, Disney Plus, Hulu)
It is important to remember that enjoying life is part of the process. If you don’t leave yourself some room in your budget for fun, this plan is likely doomed to fail.
Money for Your Savings and Debt Repayment
The third and final bucket is saving 20% of your after-tax income to put some money away or pay down debts. This category will vary from individual to individual. It may consist of splitting this category into 10% for saving and 10% for debt repayment. This way you can pay down your debt and save some money at the same time.
Growing your savings, rainy day fund, 401(k) and college funds are very important to budget for. Life is full of unexpected twists and turns and having that extra money is incredibly important.
What if my Debt is too High
If your debt is very high, you may want to temporarily alter this strategy. To pay down your debt faster, you may decide to temporarily alter your wants bucket and roll the extra money into the debt repayment bucket. It is important to remember that paying off your debt is of the utmost importance over the long term.
Debt accrues interest and if you don’t pay it down in a reasonable amount of time, you are just handing the lender money. This is the whole idea of lending money. Some people can handle having credit, but most people will use it at some point and these lenders are banking on the idea that you will over-extend yourself.
Tracking Your Money
All the planning in the world can only get you so far. If you do not track your spending, it is easy to get yourself off course. It is important to regularly check in on your finances and adjust accordingly. You can track your spending through physical and digital means.
This is a simple method that requires you to keep a running log of all of your spending habits. You write down everything you spend, as soon as you spend it. This way you don’t miss anything and everything is accounted for. This can be done in a budget tracker or a notebook. The downside to this method is carrying around a physical notebook and writing utensil to record these purchases.
A benefit is that the only incurred cost is to purchase the actual notebook. Another benefit is that it is mostly safe from prying eyes because it is in your physical possession.
The other method is to use an app to track all of your finances. There are many apps that can help your expenses. Apps are incredibly convenient, but they range from free to a monthly cost. You will have to decide what works for you and your family. An issue with using the digital method is the risk of data leaks. Just like all digital services, data leaks and breaches are always a possibility.
Some apps that you may want to look into are:
- Clarity Money
These can either be app-based and/or web-based services. You have to enter all of your incoming and outgoing expenditures to keep track of it all.
If you are tired of debt or just want to get better control of your financial life, it is imperative that you plan accordingly. Money management is a habit and you have to work at it to ensure it is used properly and accurately.