Do you have a money management strategy? Specifically, do you have a plan for your money (paycheck) as soon as you receive it or automatically deposited to your bank account?
In reality, the answer is yes — for everyone. You have one of two money management strategies:
- You spend your paycheck until it’s all gone, or
- You allocate your paycheck according to a planned strategy.
If you haven’t saved any money by the end of the month … your money management strategy is the first one listed above. This strategy leads to living paycheck to paycheck, bad debt, oppressive stress and ultimately financial failure.
Obviously, you will be a happier person if you don’t have to live under the constant stress of money woes. The solution to moving from the burden of financial stress to financial well-being is actually simple to understand and easy to implement — once you are committed to getting your financial life in line.
Financial money management goal
Your financial goal should be to get your personal financial situation to the point where you are no longer constantly living under financial stress. The days of living paycheck to paycheck will be over … forever!
To get to this point, you need to allocate your paycheck (money) to a money management strategy that has proven to be successful — in the good times as well as the bad times.
- 50% of your bring-home (net) income should go toward your needs (necessities)
- 30% should go toward your ‘wants’
- 20% should go toward your savings and investments
Needs are your bills that are essential to pay and are the things necessary for your survival. These include rent or mortgage payments (principle, interest, real estate taxes and home insurance), car loan payments, groceries, insurance, health care, minimum debt payments on credit cards, and utilities. These are your “must-haves.” The “needs” category does not include items such as premium cable TV, Starbucks, concert tickets and dining out.
Half of your bring-home (net) income should be adequate to cover your needs. If you are spending more than that, you will have to either reduce the amount for wants or downsize your lifestyle.
Wants are all the things you spend money on that are not essential to your survival. This includes dining out, movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. Anything in the “wants” category is optional when you honestly analyze it. You can work out at home instead of going to the gym, cook at home instead of eating out, or watch sports on TV rather than buying tickets to the game.
Finally, you need to allocate 20% of your bring-home (net) income to savings and investments. You should have at least three months of your net income in an emergency fund in case you lose your job or unable to work.
If you don’t already have an emergency fund, split this 20% between funding an emergency fund and adding to your savings. After that, focus on retirement and meeting other financial goals down the road such as an education fund for your children.
Saving is difficult, and life can throw unexpected expenses at you — when you are least prepared. By following the 50-20-30 rule, you will have a plan to work through the good times as well as the bad times. If you find that your expenses for “wants” are more than 20%, you need to find ways to reduce those expenses to allocate funds to more important areas such as an emergency money, education for your children or your retirement.
Start 2021 with the commitment to take control of your finances!