Week 2: 50/30/20 Series Part 1: 2nd Half!

**Read through this- but do not panic! I will add a worksheet to simplify this for you later this week!

SO, I bet after writing down all your expenses that you kinda…sorta…  just wished you had gone to the mall to shop instead, right!? I have some GOOD news for you! This plan WORKS- and it’s a LIFETIME plan. You are investing in yourself, and your future. Now is the time to get EXCITED!

Here are some food for thought things to think about.

We briefly touched on the fact that the rules have changed over the years. Remember when Mom and Dad, and even Grandma and Grandpa built their home, and lived their lives? They were probably middle income families, and lived a middle income lifestyle, right? You know why they didn’t have a home to keep up with the Jones’ or a car that was the envy of the state? Because the bank would ONLY lend what they could afford!. Our parents and grandparents lived in a generation that you sat down with a banker, provided pay stubs, tax returns, your third child, etc.- and you had to JUSTIFY your loan right up front. If you couldn’t do it, the banker said NO. There were no “cash out” or “Zero down” mortgages, and car payments were not a standard $400 a month, and there was no such thing as leasing. Tuition at college was less than $1 a day, no one started adult life off with ginormous student loans. Jobs lasted for 20-30 years into retirement ages. They didn’t hear about layoffs, and their bosses either paid for health care insurance or didn’t offer it and health care was a manageable option for every family.

The result? They lived within their means, and just plain made it work! We do not live in that generation. We live in a generation that spends beyond our means, and mostly, beyond what we really NEED. We live in a generation that the rules have changed. We live in a generation that sets us up for financial failure before we even begin.

Guess what? That is NOT an excuse to be out of BALANCE financially! All you need to arm yourself with is that awareness- how you choose to live your life is entirely up to YOU! Now is the time for YOU to take charge!

Let’s help you get started!

PART A-Categorizing My Spending

 The first thing you will learn is you MUST categorize your spending. This is how we will break it down. Take that list of all your bills and payments from last week. On another piece of paper, divide into THREE columns. Label:

·         Column 1: NEEDS

·         Column 2: Wants

·         Column 3: Savings/Loan Repayments

It is now that you need to sort your bills into each category. They should be categorized as follows:

NEEDS Category- Rule of thumb-ask of each bill:

1.Can I live in safety without these things for a while?-Necessity

2. If I lost my job, would I have to keep spending money on this? -Necessity

3. Can I live without this purchase for 6 months? (Clothing budget, excessive grocery budget, etc.) Variable.

NEEDS Examples: Mortgage, rent, utilities, medical insurance, transportation, minimum credit card payments, CONTRACTED bills (cell phone that has 2 years left on it), groceries, daycare (If needed for job), employer deducted insurance/disability/life insurance premiums, bus/train transportation, car payment, auto insurance, gasoline, student loans, child support. Also include homeowners, insurance, renters insurance, property taxes (divide by 12 if paid yearly),  Prescription costs. Anything long term you have signed a contract for goes here(gym memberships, appliance payments, satellite –anything you MUST pay until the contract is UP),  Basic  phone (not call waiting, extras) go here also. CREDIT CARD MINIMUM PAYMENTS go here. Whatever you pay EXTRA goes under the savings/loan repayment column. However, if you pay off your credit cards every month, and it’s not for a NEED- put the Credit card payment into your WANTS category.

WANTS: Non contracted cell phone bill, cable tv, cleaning service, haircuts, new shoes/clothes, new furniture, monthly club dues, movies, eating out, babysitting fees (NOT daycare!), new pet in the family, car washes, massage, charity donations, video games, concerts, CDs, trips to vacation spots, dog grooming, camps, upgraded appliances (cappuccino machine, etc.), magazine subscriptions. (The food from your grocery bill that is not needed goes here: eating  out, alcohol, soda pop, power bars, steaks every week, etc.) IF you drop your child for after school daycare but could live without it- it’s a WANT. Christmas/birthday gifts go here. Again, , if you pay off 100% of your credit cards every month, and it’s not for a NEED- put the Credit card payment into your WANTS category. GYM MEMBERSHIPS go here- you can cancel a gym membership, even with fees, at anytime. It is a WANT. {Exception: if your fees to cancel the gym membership are higher than the remainder of what you have to pay monthly until your contract expires- then change this to your NEEDS column until it's paid off}

Savings/Loan REPAYMENT examples:

1^st category: Traditional savings, travel savings, college savings, 401k contributions (both yours and your employers), Christmas club. If this amount varies, add up last 12 months and divide by 12 to get your average.

2^nd Category: Debt repayment (Saving for your future): ANYTHING over the minimum payment on loan repayments/credit cards, extra yearly mortgage payments, etc.

IMPORTANT!! 

TO figure up your savings- take the amount of money you set aside for savings, and subtract your extra payments from it. For example, if you save 300 a month, but pay $200 a month in extra payments, your savings number is $300-$200= $100 you are saving. Many times this is a negative number (no savings and paying extra on payments- put the negative number down as necessary).

  **If you pay off your credit cards every month, put this in your needs or wants category and not here!

 Write each of your expenditures down in each column, and then TOTAL your columns. I bet before you start, you probably already have an idea of where you are heavy on your categories, but let’s make sure you have a total so you can figure your budget percentage later.

BE SURE TO ADD UP EACH COLUMN!!! Let’s move on!

PART B –Knowing where my numbers NEED to stand

What is the balanced money formula? 50-30-20.

·         Must-haves: My  MUST HAVES goal for my income should be at 50%

·         Wants: My spending on the things I want should be at 30%

·         Savings: My savings and loan repayment should be at 20%

**We will discuss in the next series why these numbers work.

Simple, to the point, effective: For a LIFETIME.

SO- What is your financial formula now, based on what you bring home AFTER taxes?

To start, look at that very first page from last week and look at your income. (This is your TOTAL INCOME minus TAXES). Math time!

1.       Take your TOTAL AFTER TAX income, and multiply it by 50% (income x .50) This is your goal for 50% NEEDS- write it down at the TOP of your NEEDS category.

2.       Next, calculate your after tax income by 30% (income times .30)= 30%- write this at the top of  your WANTS category.

3.       Last, calculate your savings and loan repayment category (income x .20)= 20% of your after tax income.  Write this at the top of your savings category.

PART C –knowing where my BUDGET stands NOW

At the BOTTOM of each column, you are going to write a number.  {Examples are based off a 20,000 income- example only!}

1.       Column 1 (Needs) –take  your total in this column of your budget that you spend on NEEDS, and divide it by your TOTAL after tax income. So, it looks like this:

               14,000 worth of bills (Needs) divided by 20,000 (after tax income) =.70 (write down 70 percent)

2.       Column 2 (Wants) –take your total in this column of your budget that you spend on WANTS, and divide it by your total after tax income. Write that number at the end of your WANTS.  It would look like this:

5400 (Wants) divided by 20,000 (after tax income)=.27 (write down 27%)

3.       Column 3 (Savings/Loan repayment) –Remember to take your savings and subtract your extra loan repayments to get your savings number.

Then, take your total in this column and again, divide by your total income after taxes. It would look like this:

$600 divided by 20,000 (after tax income) =.03 (write down 3%)

SUMMARY

By looking at each totaled column, you now see what you ARE be spending, and you have now figured out what you SHOULD be spending- how close are you? Are you balanced at 50/30/20? My guess is…probably not- most of us take a while to get there! The good news!? That is your goal!! Do you now see why you have been doing that head beating against the wall with your finances and getting nowhere?

BALANCING YOUR MONEY IS THE KEY TO HAVING ENOUGH.

A couple key points:

1.       It takes on average 3-5 years to get to a 50-30-20 balance. Some people are able to get there in 1-2, but generally, it takes longer. This is normal!

2.       Is it ok to drift from this formula at certain times in your life? Of course it is! If you are laid off, clearly your income must go to your MUST haves while you cut back on your wants and savings- FOR A TIME. Remember, finding balance can take 3- 5 years!

3.       This formula is not meant to make you feel discouraged about where you are. It is meant to ENLIGHTEN! Keep your head up- there is a light at the end of this tunnel!
T   There are special circumstances if you carry a lot of credit card debt. We will have to adjust your actual NEEDS category accordingly. We will address this later. 

Next week, we will:

1.       Explain why 50-30-20 is important as a financial formula, and why it works

2.       Show you where you are in each category

3.       Discuss THINKING TRAPS- the stumbling block of success, or BALANCE!

Until then, do your calculations to look at your picture! Feel free to leave any comments below if you are unsure of where an expense should be categorized!

Karen