We do a phenomenal job of promoting the importance of education in this country. There is so much time and effort spent on learning how to get a great job and earning a paycheck. However, we spend very little time learning what to do with the money we earn. This is the sole reason why many people in this country struggle with their finances. It’s shocking with all the tools and resources that are available, people continue to live check-to-check.
The problem stems from the fact that most people are afraid to discuss their personal financial matters openly. If you need help and you never tell anyone, how exactly do you intend on doing better? Some may get to the point where they decide to change and follow through by doing it on their own. But the majority of people won’t take any significant action. The thing we must do is remember to keep it simple.
Let’s start from the top. Once you get paid (gross income), Uncle Sam is going to take his cut by way of taxes. Then you may have some other deductions taken out;, like health benefits, life/disability insurance or the company sponsored retirement plan. That leaves you with your actual take-home pay (net income). From here, your money (and this applies to EVERYONE) goes into one of three categories: Essentials, Financials, and Lifestyle.
Essentials can be classified as the basic expenses you need to maintain your life. There are four items which will fall into this category: housing, utilities, groceries and transportation. The goal here is to make sure that from your take-home pay, no more than 50% should be spent on essentials. Financials cover any financial obligations that you may have, like saving for an emergency fund, investing via a brokerage account, contributing to a retirement account or paying down debt.
A simple tip on saving and investing: put those items on auto-pilot. This way, from month to month, you won’t have to think about doing it; it will be taken care of automatically. At a minimum, 20% of your take-home pay should be applied to Financials. Once Essentials and Financials are addressed, the remaining 30% can be spent on your Lifestyle. People always say you can’t take it all with you when you leave this earth, so enjoy yourself. Lifestyle tends to be the most challenging category because most people are used to a certain way of life.
Adhering to this strategy is extremely simple, but you have to ask yourself, do you want to change? As adults, it’s challenging because we have lived our lives and practiced these bad money habits for years. Making such a change to improve your financial house will not be easy, but it most certainly will be worth it in the long run. Just remember, it’s as simple as 50/20/30.