With the start of a new year, this is a great time to set goals or resolutions that help to improve in certain areas of your life. Whether your goal is to improve your health, relationships, career, or finances, it’s always best to have a specific plan. Creating a plan when it comes to money management isn’t difficult because for the most part money is very predictable. Most people are paid at the same time each month and bills are due at the same time each month. There are certainly some unpredictable expenses, so it’s important to allocate for those in the same manner in which you allocate for your routine expenses. The hardest part is simply dedicating the time/ energy to creating your plan.
Creating a budget is the first step in organizing your finances and having a plan to improve your financial health. Many people try to complicate the process of abiding by a budget, however it’s really very simple. Take a moment to analyze your monthly routine income. In creating my budget, I start with the most important expenses (needs) first. My personal rule is for my monthly mandatory expenses (bills, mortgage/rent, gas) not to exceed 35% of my monthly after tax income, which is what I actually receive in hand from my paycheck after taxes, SS, and 401(k) contributions. (15% of my pretax income goes directly to my 401k.) Then I allocate another 15% of my after tax income to be automatically deposited into my savings. Most employers allow individuals to choose 2 direct deposit accounts and choose the percentage that’s allocated in each. If you don’t have this ability, you can also have your checking account automatically send 15% of each check to your savings (emergency account, Roth IRA or after tax investment account). I can’t stress the importance of this. Even if you’re only able to start by saving 5%, having a routine savings schedule is the key to improving your financial health over time. Then I take another 15% to allocate to my grocery/ eating out/ shopping budget.
Another personal rule of thumb is that I only plan to spend 50% of my monthly income. Excluding the 15% that’s automatically going to my savings, the aforementioned line items consume 50% of my monthly after tax income. I then spend about 15-20% on miscellaneous expenses such as traveling, shopping, and other entertainment. After all of this, I usually have about 30% of my check remaining that begins to accumulate in my checking account. I only keep a minimal amount in my checking account (usually about 2 months of pay) so when the balance exceeds that amount I sweep the overage into my cash savings or investment accounts.
Wealth is determined by how well you manage your assets. I’ve shared with you my personal budgeting methods that have worked well for me. Working as a financial advisor, I’m able to see first hand how a lack of regular saving and excessive spending hurt the overall financial health of individuals and families. By no means am I suggesting that you do exactly what I’ve done, but I hope you do take the time to analyze your spending and create a budget that works best for YOU and YOUR GOALS.
See below for some tools that will help you get closer to making 2015 your year to become a better money manager.