“Money is a great servant, but a bad master”
To achieve financial success, you must become intentional about your money. You can’t be a passive bystander. As we discussed last week, the first step to taking control of your money is tracking and understanding exactly where your dollars are going.
Once you actually understand where your money is currently flowing, you can then direct it to where it needs to go.
You can give your Washingtons, Jeffersons and Benjamins their marching orders. You can provide each and every dollar with a destination.
Generally, this is done through the creation of a budget. I know you may cringe when you hear the word. A budget strikes up feelings of sacrifice, deprivation, and guilt; but it doesn’t have to be this way. I prefer to call a budget, a freedom plan.
A budget (freedom plan) can be your best friend because it provides you with a mechanism by which to say NO to those things that provide little value to you and say YES to what’s really important in your life. With a budget (freedom plan), your financial priorities quickly take precedence over frivolous spending.
How exactly do you go about telling which dollars should go to cover essentials like rent, utilities and food, and which dollars should march right into your savings or retirement account?
Authors Elizabeth Warren and Amelia Warren Tyagi, in their book, All Your Worth: The Ultimate Money Plan, suggest the 50-30-20 balanced money method to budgeting.
Simply put, 50% of your take home pay should be used to cover necessities like food, shelter, groceries, health insurance and transportation. Thirty percent should be directed toward your “wants,” those things that are nice to have but not absolutely essential like cable television, a smart phone, new clothes, travel and dining out. Finally, twenty percent should be dedicated to paying off debts, building savings, and investing.
And here’s the beauty of the system: One of the most important concepts of all of personal finance is, “Spend less than you earn. Save, pay off debt, and invest the rest.”
The 50-30-20 balanced money budget (freedom plan) does exactly this because it actually forces you to spend less than you earn and use the remainder to save, pay off debt, and invest. Remember, the 50-30-20 plan requires that 20% of your money be spent on saving, debt repayment, and investing.
But, what if you just can’t pull off directing 20% of your income toward savings, debt repayment or investing? That’s OK. Simply start off with a smaller percentage of your income directed toward these categories.
Start, for instance, by budgeting 5% of your income to be used toward paying off debt, saving, or investing. As you get better with budgeting, gradually increase the portion of your income directed toward these items until you’re spending 20% or more of your income on saving, investing and paying off debt.
A simple budget could be the freedom plan that allows you to take charge of your money and build true wealth.
BMWK, have you started to create a budget (freedom plan)?