Have you ever heard of the saying, 'Count the cost?' Counting the cost means accounting for what goes out versus what comes in. In simpler terms it's how much you spend versus how much you make. What we are going to learn in this blog is the value of saving, how to save / budget, and how to maximize the dollar. Lets get into it!
1) Remember 50 / 50. The first step you should always take is knowing exactly how much you owe each month. Then you need to calculate how much you make (After taxes). Once you've done that, look at how much is left over. A good rule of thumb is to have 50% of your money go to bills and 50% remaining for savings and spending. If your bills are more than 50% of what you make, then technically you are living for your bills.
We don't want our bills to own us, we want to own them. Again, remember to ALWAYS calculate after taxes. Seems basic, but surprisingly many people count before taxes when they start spending. Are you constantly running out of money? If you answered yes, then more than likely you are paycheck to paycheck. If this is true, you are in the red zone. Fear not, the point of this blog is to help you get out of it. Imagine instead, if your net income was $4000, your bills were $2000, and you had $2000 remaining. Much better, wouldn't you agree? The salary I'm showing you may seem high or low. In any case, use your own salary and follow the same guideline. If you make $5000 net income a month, max $2500 to bills, $2500 savings and spending. If 50% of remaining disposable income seems like a lot, I have news for you, it isn't. That is the minimum. It's better to have more. For now try to make 50% a goal.
2) The second step is to separate your outgoing expenses into 2 different categories. Needs and wants. Your needs are what you NEED to survive otherwise you're putting yourself in great harm. I say it to that degree because many people justify the craziest things in order to have it in their needs category. Your needs go as such: food, clothing, shelter. There are some other needs to consider as well. Depending on our job, a phone would be considered a need. A laptop would be considered a need. Use common sense and good judgment. Your wants go as such: membership club, gym club, cable bill, weekly stop to the nail salon, Etc. Once again, use common sense and good judgment. I know all the ladies out there would put makeup in the needs category, I know I do! But perhaps you are subscribed to certain expensive makeup and hair memberships that you really don't need. While compiling your list of needs and wants, be honest with yourself.
3) Once you've separated your needs and wants, take your wants and trash them. I'm being absolutely serious. If you are reading this and you are paycheck to paycheck, then you my friend, are broke. Being broke is a scary place to be. You owe it to yourself, you owe it to your family, you owe it to your future. Get yourself out of that bad situation. Majority of Americans don't have a savings account, not just because of a low paying job or because they were born in a bad situation. A lot of the times it's because of the lack of education when it comes to spending. I know a lot of people who are paycheck to paycheck and when I review their finances, the overwhelming majority of them are spending their money needlessly. Frankly they're being irresponsible. I'm not mad at them and I don't really blame them. Although I do believe every individual should take ownership of what they have, a lot of it is our education system. Spending and budgeting, learning about credit, loans should be mandatory in high school. Well at least in my opinion. We would sure be a lot better off.
4) Once you've trashed your wants, how much do you have left over? In my line of work, I've seen some clients come up with an extra $500 to an extra $2,000 a month. You're probably amazed yourself. How much did you come up with? Now I want you to divide out how much money you need for food/gas. Be honest with yourself. Whatever number you come up with, stick to it if possible. Everything that is left over, goes to savings. When I say everything, I mean everything. Once you start getting into the habit of 'treating yourself', that is a very easy road to getting right back into the red zone. You need to look at it like this, until you have a healthy savings account, you are broke. If a new bill will cause your total bills to exceed 50% of your net income, you can't afford it. Period. I know it's hard core, but it works. Remember how you got into this situation to begin with, a little bit here a little bit there, and before you know it, you're paycheck to paycheck. The cycle needs to end, and it can end today if you choose.
5) Your 1st goal will be to save up to 3 to 6 months of bills owed. I'll let you decide on how long you can handle the savings part. But ideally 6 months, or a minimum of 3 months. You want this saved up for obvious reasons. If something happens, and you or your life partner lose your job, it can typically take 3 to 6 months to find another one. That's the whole reason behind having 3 to 6 months of savings. Don't touch it. Store it and ignore it.
6) So you've reached your savings goal. You're paying all your bills and you have your savings set aside in case of emergency. All done right? Now you can start spending away right? Wrong! Now you'll need a spending fund. What's the spending fund? Well your savings fund is for your bills (needs). You're spending fund is for spending (wants). How much do you spend a year on vacation? That can be a part of your spending fund. How much do you spend monthly on going out? Well that can be added to the spending fund too. You're spending fund is for your wants. That amount can be $5000 or $10,000 or whatever you spend.
For your spending fund, you don't have to put all of the money left over after you've paid your bills each month. But I would recommend at least half. The other half can go towards wherever, a restaurant, movies, or makeover. The spending fund works like this, whatever you spend on your wants, you pay back. Let's say you take a vacation and you spent $2,000 from your spending fund. Well now you have to pay it back with half of your paycheck leftover after bills. This way you always have spending money. Get it? The reason why a lot of people don't have money to spend is because they're constantly spending what's left of their check. Nothing's ever coming back. Once you have a spending fund set aside you'll be thankful you did. It's a good way to guarantee you always have money.
7) So now your bills are being paid, you have a savings account, you have your spending account, what about the money left over from your paycheck? Blow it? Well that's up to you. You see, as long as the important things have been budgeted and saved up, anything extra is extra. And this my friend, is the green zone (Cue angels singing?). It's a beautiful place to be. It's when you know you're in a good spot. And this is a great goal to set for yourself. I'll tell you what, there's no better feeling then Financial Freedom. And the foundation of Financial Freedom starts with a good savings account. It's knowing that everything you have, has been properly budgeted.
8) Investment account. While your money is in your bank account, be sure to ask to speak with your branch's Financial Advisor. Ask to place your money in an investment account. Your savings account should be in a conservative investment account. This is an account that doesn't have very fast growth because it's focus is more on security instead. For your spending account, this you can ask to be placed in an aggressive growth account. This is to ensure that your money grows as fast as it can. Because it's the spending fund, you can be a little bit more aggressive with the investment. The reason why you want your money to always be in an investment account, is because you want your money to keep pace with the market. When your money is just sitting in the shoebox, you are not keeping pace with the market which means you are losing.
9) As an option, with your money that's left over after bills, separate from your savings account (needs) and spending account (wants), consider opening a separate investment account (shoulds). With any extra money you have, this would be an excellent place to put it. You can keep adding to it and it will continue to grow. You can view it in several different ways. It could be an account for your children's college fund, future wedding fund, or an addition to your retirement fund. Talk to your Financial Advisor about different investment accounts. Also read my article on the Rule of 72 as well as my article on Diversification.
10) What if none of this applies to you? What if you don't have any money to spend? What if after dividing your needs and wants, you don't have much left over? The answer is simple, and comes down to one of two things. Either your bills are too high or your job pay is too low. You need to figure that out. If you like your house, apartment, car then the answer would be to find a higher paying job or ask for a raise. If you like your current job, then downsize. Start today. I hope you make the best decision possible. This article is not for job-seeking. This is to show those who are able, how to properly save and budget.
In my line of work most people have something left over once they've divided their needs and wants. Use this to your advantage. No it won't be easy. In fact, depending on your situation, this can sometimes take a year to do.
In this example, it may take this person 17 months to reach his/her goal of a savings and spending fund.
Savings 9930 (3 months) - 8.5 months (9930/1170=8.5)
Spending 5000 - 8.5 months (5000/585=8.5)
You're going to fall down. Just get back up and try again. Before you know it, you'll be where you need to be. You can do it! What we all want is to be happy, and freedom from the stress that comes from not having a balanced budget. Properly categorizing your needs, wants and shoulds will help you to achieve that. Thank you so much for taking the time in reading my blog. Please leave a comment below and don't forget to subscribe!
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