Here’s a piece of advice to live and budget by, care of lifestyle guru Mark Twain: “Comparison is the death of joy.” That is to say, comparing your spending habits to everyone else’s spending habits will only end in tears, frustration and sadness.
Basically, there’s no such thing as “normal” when it comes to spending. Sure, there are norms, but even those are variable. And not only are norms variable, they’re defined by factors that are not within your control, such as your zip code, tax bracket – even the seasons!
What you should be asking yourself is: What’s your normal?
Defining normal spending for you:
Here’s a calculation that everyone can live and budget by, care of Harvard bankruptcy expert Elizabeth Warren: the 50/30/20 rule. Meaning, to keep spending within your means, after-tax dollars should be budgeted according to…
- Your needs, which should be limited to just 50 percent of your net income.
- Your wants, which should only take up 30 percent of your budget and spending.
- Your savings and debt repayments, which should equal at least 20 percent of the money you earn each month.
Establishing your 50/30/20 will require some money tracking, cost evaluating and emotional digging on your part.
To help establish your 50/30/20, ask yourself three questions:
- First, manage your habits . Is there a way to make them work for you instead of siphoning off every dollar you earn?
- Speaking of siphoning, are you spending money on energy you could be saving?
- Finally, the path to financial stability is not always paved in mortgages and car payments. What other spending options can help you chart your course?
Once you’ve evaluated your baseline 50/30/20, financial decisions will be easy – just crunch the numbers to see if adding a new bill will fit your ratio!
Habits come in three varieties: the good, the bad and the ugly. Is there a way to make them work for you instead of siphoning off every dollar you earn?Read More
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