Many people don’t want to talk about money, especially if they may be facing financial problems. No matter your relationship with money, you are not alone. Anyone can take control of their financial life with a good framework and a little math. Better yet, you can get on the road to financial freedom!
It’s not surprising that managing money is a problem for many Americans. Unless your parents or a close friend educated you, you probably just didn’t know. Doesn’t it seem odd that money and budget management is not in most of America’s K-12 curricula? Even a two-hour course would give most people a huge boost in confidence to make the most of their money. Well, it’s never too late to take control.
This post is the first of a three-part series that will cover how to think about: 1) assessing and managing budgets, 2) managing debt and getting out of credit card debt, and 3) building savings and money management priorities. If you prefer to watch a video on the first two topics, just view this:
Money is an Enabler
Money is an enabler. It is not a measure of your greatness as a person. Ever see a gravestone that says, “Wow, sure had a lot of money” or “too bad, had lots of debt.” Unfortunately, in America, money is often viewed as power or a measure of success. No need or time for that thinking. At its core, money helps us take care of our basic needs (food, water, shelter), better manage life’s unforeseen potholes, and can also enable us to go after our dreams and passions as well as help those we love.
So, let’s get started. This money management framework is what many good financial planners will use to help their clients.
Budgets – The 50-30-20 Framework (Needs, Wants, and Savings)
Once you have a job and earn money, it comes down to how you divvy your money up and take control. One of the most accepted frameworks is that 50% of your earnings will go to essential needs (shelter, food, utilities), 30% to wants, and 20% to savings.
50% of your earnings go towards needs:
- Housing (rent or mortgage – shouldn’t exceed 30% of your overall earnings)
- Utilities (electricity, water, garbage removal)
- Transportation (needn’t be a car – could be commuter money)
30% goes to wants:
- Dining or ordering out
- Entertainment, Cable, Movies,...
- Gym, Sports,...
- Special clothes, salon,...
20% goes to savings (future needs/self):
- 10-15% retirement
- If you have access to a 401(k), at least contribute enough to get the company match
- Build to 10-15% of your salary if you are unable to at first
- Build up an emergency fund of $1K-$2K and then work to get to 3-6 months of your salary in a savings or money market account so you can better handle a financial shock be it an appliance failure, health need, or a temporary job loss
- Save for a property or a car
- Education (Your job needs or 529 for college or other general needs for kids)
When you are first starting out and/or working to get to a self-sufficient income level, the 20% savings piece may be the toughest to attain. However, you won’t really know until you take a look at the last two to three months of your earnings and spending to see where you stand. Then you need to think about a plan to put you in line. Remember, money management is about simple math. Without this you may be relying on "hope" and that's not a plan. Things don’t tend to just work out. However, if you put a few hours of work in, you can assess and find your opportunities.
Assessing Your Situation
Go grab your credit card and banking statements and categorize your spending for each month in the 50-30-20 buckets. We suggest you use 15-25 subcategories under each such as Mortgage/Rent, Utilities, Insurance, Entertainment, Ordering/Dining Out, and so on. This may take one to four hours to do the first time depending on your situation. Once you have this pulled together, you will want to ensure you are earning more than you are spending. If not, what adjustments can you make to stop the leakage? Next, you will start working to look for changes to move you towards the 50-30-20 budget.
A simple spreadsheet (available free via Google or use Microsoft Excel or Apple's Numbers) is all you need to stay on top of this. If you want more tools, consider Quicken. Once you have this setup, update your tracking once or twice a week (15 minutes should do it) and review and work to stay within this framework. Make sure you do a monthly recap to see how you did and identify what you can manage better. You needn’t be exactly 50/30/20, but you will want to be in the ballpark and think about what changes you can make to get there and stay there. You can do this!
We’ll talk about debt and eliminating bad debt in the next post.
This piece is meant for educational purposes. For advice for your specific needs, you may want to meet with a tax, legal, and/or financial advisor.