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The Ideal Budget


The Ideal Budget

A smart spending plan gives you the best shot at financial freedom.

No matter what you make, there is a way to live within your means, stay out of debt and save enough for your short- and long-term goals. It involves a dirty word and pieces of pie.

The dirty word is "budget." Whether you're a spender or saver, there comes a time when you have to get a handle on your cash flow. Maybe you're buying a home, getting married, starting a family or planning for retirement. Or maybe you've just got a credit card balance.

The pieces of pie are the portions of your income dedicated to broad-based expenses and goals, such as savings, debt and taxes. The size of these pieces can make the difference between living securely and living beyond your means.

Two of the biggest budget blunders people make is not knowing how they spend their money and not prioritizing their financial goals or, at least, not spending money in a way that reflects those priorities.

Of course, there's no down-to-the-penny budget that works for everybody since people differ in their needs and desires. But here is a budget that can serve as a guide to help adjust your spending so you can meet your financial goals.

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Enter the ideal budget

Devote no more than 30 percent of your gross income to housing and debt, including mortgage or rent payments, credit cards, loans and other liabilities. "If you can't pay off your balance completely you're living above your means and you shouldn't use them," she said.

The second big bite of your money goes to taxes, which should be capped at 25 percent of your gross income. That's a total for your federal, state, local and property taxes, plus the money deducted from your paycheck for Social Security and Medicare. (If you're in a high tax bracket, say 30 percent, that doesn't necessarily mean you've exceeded this guideline. That's because only a portion of your income is taxed at that rate; and deductions can lower your overall tax liability.)

Ideally, too, no more than 24 percent of your money should go toward household expenses. This category includes everything from food, clothing and daycare to home repairs, entertainment, personal care and vacations.

The next big category is savings and investment. Set aside at least 15 percent of your gross income. This is the part of your budget earmarked for retirement and college savings, as well as an emergency fund and near-term needs, such as a down payment.

Lastly, allocate a cap of 4 percent for insurance expenses and 2 percent for transportation costs.

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When your life is not ideal

No matter how ideal a budget is, however, it may not seem workable in real life.

But there are at least three good reasons to size up your spending, whatever it is, against the budget allocations. 1) you're married to a member of Spouses Who Splurge and you're desperate for ammunition in the marital spending wars; 2) you might actually feel good about yourself - after all, maybe you spend less than the recommended caps; or 3) you're missing the mark on a financial goal and using our budget worksheet will help you see where you need to cut costs to get back on track.

For a budget to be able to work, your bills can not exceed your cash flow. Make sure all your spending and saving doesn't exceed 100 percent of your gross income, and the way you spend your money is consistent with your financial goals and deadlines.

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And, let's face it, there are outside factors, like where you live, that heavily influence the size of some pieces in your spending pie. Take Manhattan, where few blink an eye if you must pay $300,000 for a one-bedroom apartment whose best features include a coat closet.

But if that's the case, you will need to cut elsewhere. You might use your credit card sparingly, veto optional household expenses, and save on transportation by using public transit.

What you don't want to do is cut into your savings. But feel free to add to them whenever you can. In fact, you'll have to if you're in your 40s and are just beginning to save for retirement, you'll need to put away 20 percent or more of your gross income, and adjust the rest of your budget accordingly.

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When budgets make you bristle

If a budget is like a diet, then for the budget to stick you have to build in regularly scheduled treats. Set aside a small amount of play money to indulge yourself once a week in a manicure, a golf magazine, two lattes or whatever floats your boat. "That helps people have a sense of freedom and control."

Financial Freedom means keeping your train on the right track in order to enjoy the view down the road!

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The Ideal Budget

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