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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.
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.
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.
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.
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!
The Ideal Budget
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