Tuesday, January 24, 2012

The Perfect Budget Solution

Here it is, the perfect budget solution:

I made this chart myself on chartgo.com

It took me a while to figure out the perfect budget solution.  Everyone has their own method; this is the solution that I have found to work best for me.  You can use it as a blueprint and adjust the percentage pieces of the pie to your preference.   
This budget suggests that for every $10 that you make, you only get to spend $2 on guilt free fun expenses.  You're probably spending more than that right now.  If you're spending more, something could be wrong with your financial habits.  If you live at home with your parents, 50% of your income may not go towards your fixed costs.  In this case - money that is left over should be put in your home down payment fund.

You've already learned that you have less money than you think.  Hopefully you also started to track where your money is going.   Although I have a feeling you haven't downloaded Pocketmoney yet.  Why not? Stop procrastinating and go do it now.

Here are the components of the perfect budget solution:

50% Fixed Costs (necessary expenses that are constant: rent, car payment, bills, utilities, groceries, debt, cell phone, fuel, charity, etc)
10% Investments (long term goals: 401K, IRA, taxable accounts)
20% Savings (short term goals: vacations, gifts, expensive electronics, emergency fund if you don't have it)
20% Fun Money (guilt free spending: eating out, movies, new clothing, new electronics)

How should you properly budget?

When you get your paycheck, pay yourself first:

1. First, put 20% of your paycheck into your savings.  Once you save $1000 for your emergency fund, open another savings account.  I will teach you how to organize your multiple savings accounts.

2. Second, maximize your investment fund(s) - at least 10% of your income.  If you're still getting your finances together, this includes your Roth IRA and maybe 401K / 403B if you work for a corporation.  If you're working, getting a steady paycheck, and you haven't started funding your retirement account, you're already falling behind.  I will teach you how to play catch up with your retirement accounts.

3. Next, take care of your fixed expenses.  These are expenses that are somewhat constant every month: rent, utilities, groceries, debt / loan repayment, cell phone, fuel, etc.  These expenses should be taken care of before personal fun money because these are the expenses that you need to continue to live by.  Pay your bills automatically when you receive them.

4. Lastly, take the last 20% left over from your income and go enjoy it on something that makes you happy.  You've already paid off all of your necessary expenses, set aside money for the your short term goals (savings), and set aside money for your long term goals (retirement).  I won't judge you on how you spend the last 20%.  Go buy a nice watch, some new clothes, a new laptop, some new shoes, or go eat out at that fancy restaurant you've been meaning to try.  You really deserve it;  you're better off than most Americans and probably most of your friends.

You've got a financial problem if you find that after paying yourself first (fixed costs, savings, investments), you don't have any money left over.

You need to stop living a treadmill existence.  If you don't have enough money to pay your bills while you have a paycheck coming in, how do you expect to pay those exact same bills later in life when you no longer have a paycheck?  The answer: you won't be able to.

Congratulations on discovering this problem now.  Most people don't realize they have this problem until it's too late.  By then, they're too old to make any lifestyle changes, and they end up being dependents.  They depend on their rich parents to take care of them.  They depend on their working children to take care of them.  They depend on a meager government Social Security check to support them.  They're incapable of having financial independence and the ability to take care of themselves.

If your fixed costs make up more than 50% of your take home pay, something is wrong.  Your home / rent / car payment / etc is more expensive than you can afford.  I will teach you how to cut back on these fixed costs.  Or maybe your fun spending money is out of control and you don't have any room for saving or investing money after your shopping sprees.  

Wealth is not about having fancy things.   When you spend all your money on shiny things that depreciate in value, you contribute to your own treadmill existence.  Most people are on an earn and consume treadmill to fill their desire for abundant material possessions.  They are debt prone, and far from being successful.  

Remember that wealth is not the same as income.  If you make a good income each year and spend it all, you are not getting wealthier.  

Did you know that 4 out of 10 doctors make over $200,000 a year, and yet only 1 out of 10 doctors is a millionaire? 

Wealth is what you accumulate, not what you spend.  True wealth is not living in the fancy home with the fancy furnishings and driving your fancy car.  True wealth is not your parents' money or the money that you inherit or the money you marry into.  True wealth is what you make for yourself.  True wealth is to be able to live below your means, take care of your parents, support your children, and give to charity - all independently.  If you have money left over after that, high five.

Did you know that 85% of millionaires are first generation rich?  They weren't handed down money from their parents or rich spouse, they didn't win the lottery, and they aren't celebrities.  They made their own money: through a lifestyle of hard work, planning, and self discipline.

If you can independently pay for all of your fixed costs, save money, invest money, and still buy nice things, you are truly successful.

This is your goal.  I will help get you there.

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