Budgets aren't fun but you need a spending plan or it's going to eventually catch up to you. Sure, it’s great when you’re earning enough money to cover your expenses and don't have to worry too much. But are you actually building wealth or are you just a spending machine? And what if you are not earning enough to cover your expenses and are using credit cards to finance a lifestyle? Regardless of your financial situation, you need a spending plan. Below is an easy way to start budgeting with only these five categories and percentages of your income:
1. Savings (Pay Yourself First. Preferably at least 10% but if not possible, start with something…today!).
Pretend you lost your job and could only find one that pays 10% less than your old one. You’d figure out how to make that work. You need to pay yourself for all of your hard work. The rest of your money is going to others, you might as well keep some, at least 10%, for the days when the money stops coming in.
2. Housing Costs (No more than 35%)
Include everything related to your house in this number. This includes mortgage or rent, property taxes, insurance, association dues and ESSENTIAL utilities.
3. Transportation (No more than 15%)
While you should target less than 15%, depending on your situation, this may be the right percentage for you. This includes car payments, insurance, gas, maintenance and tolls.
4. Other Living Expenses (No more than 25%)
With the exception of groceries, these are discretionary expenses such as eating at restaurants, vacations, and entertainment. This is where most of us have our money disappear. This can be the most difficult category to control. Be diligent and honestly ask yourself before spending if it's really necessary or are there less expensive alternatives.
The Latte Factor was popularized by author David Bach, he identifies everyday items we purchase without much thought. He points out the impact on our future wealth creation if we saved that money instead. For instance, saving $20 a week by reducing restaurant meals and assuming a 6% return, you’d accumulate over $14,000 in 10 years, $40,000 in 20 years and over $87,000 in 30 years.
5. Consumer Debt (At least 15% until paid off)
Consumer debt keeps people working longer and harder, sometimes at jobs they strongly dislike, and way past the time they should be out enjoying themselves. Get rid of this freedom destroyer as soon as possible. And once you do, redeploy those hard-earned dollars to your savings category. That will speed up your options to do whatever it is you want to do on your own terms. That's financial freedom.
Fialkow Financial Planning
Fialkow Financial Planning is located in West Palm Beach, Florida and accepts clients nationwide. I provide high quality financial advice to people from all walks of life and income levels without the need to sell products, take assets under management for a fee. I proudly embrace my fiduciary responsibility.
Investment advisor representative of and investment advisory services offered through Garrett Investment Advisors, LLC., a fee-only, SEC-registered investment advisor. Tel: (910)-FEE-ONLY. Fialkow Financial Planning may offer investment advisory services in the States of Florida and Texas and in other jurisdictions where exempted.
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