Submitted by guest author Elaine King, CFP®, Founder, Family & Money Matters ™
During times of uncertainty, it’s easy to feel out of control — whether we’re talking about finances, or the ability to maintain a healthy lifestyle. In both cases, I’ve found balance is the key.
One approach to getting healthy is the so-called 50/30/20 diet. It’s based on the idea that 50 percent of your daily calorie intake should come in the form of carbohydrates, 30 percent from protein and 20 percent from fat.
But you can also use the 50/30/20 rule to get into better shape financially. And being financially fit and resilient is super important in the current recession.
I recently had a client that was looking for greater balance in her finances, here’s how I outlined the 50/30/20 rule for her and got her financial health back on track.
50% of financially healthy essentials
Some experts recommend getting half of your total nutrition from carbohydrates because carbs give you the essential energy to live. At one stage in my life, I tried for a very short time to live without them, but I found I got very little done. Similarly, we all have financial essentials that we’re responsible for. These are the bills and obligations that you must cover in order to survive no matter what happens. Under the 50/30/20 budgeting rule, these should represent no more than half of your total expenses.
In the case of my client, these essentials included her cell phone, internet, rent, utilities, food, car, insurance, gas and health insurance. She also had credit card bills, which were her main struggle. You could argue that credit cards don’t belong in this category, but these days many people are being forced to rely on them. When the premiums and interest start to add up, then staying on top of your credit bills needs to become a priority. In addition to that, my client wanted to start a small business, but she had accumulated debt that was hurting her credit score, so the bank would not approve her loan.
So how do you keep your financial essentials to just 50 percent of your total expenses? Firstly, it’s crucial that you write down each expenditure that will go into this category. You can use a tracking tool (like Mint/QuickBooks) and categorize these expenses as essential. You can also use an Excel spreadsheet and color-code your essential expenses by making them a specific color. Start by looking at your last year’s expenses to see what is recurring. See something that really isn’t essential? Kick it out of your essential’s category like a boss. You might be surprised at how empowered this makes you feel.
30% of financially healthy wants
Life is to be enjoyed — no doubt about it. So, whether we’re talking nutrition or finances, there’s nothing wrong with having wants that are not strictly essential. However, many people today are barely scraping by, so now more than ever moderation is your friend. That’s why I recommend keeping your wants to no more than 30 percent of the entire pie of your expenses. If you’re one of the fortunate ones who can afford even a modest slush fund in these challenging times, you’ll need to take extra care to keep this category under control. Do you absolutely need that video streaming subscription to watch the must-see TV your friends are talking about? Is that expensive bag of coffee really critical for reaching your long-term financial goals?
This was the hardest part for my client because she was really into health and nutrition. She’d often buy the latest blender for her shakes, the latest vitamins and the most fashionable sporting gear. She travelled the world to attend fitness conferences and more. We had to agree to limit these expenses and set priorities in order to make room for her long-term goal of financial independence.
So, what’s the secret to not going overboard with your wants? I recommend visualizing your “want” fund monthly, and periodically reviewing it to reflect your objectives. A lot of my clients find they’re still subscribed to things that don’t add value and that they’re paying for out of habit. Do a detox of these variable expenses this month. I also recommend using a tool that tracks these expenses. Some of them, like Mint, can be programmed to send you an alert every time you go over a certain dollar amount. So if you budget $40 a month on take-out food, Mint will tell you if you order one pizza too many.
20% of financially healthy savings
In volatile times like these, allocating 20 percent of your expenses to savings is critical to growing your funds and boosting your financial resilience.
In the case of my client, planning for savings was not an option in the first six months because she had to first reduce her debt. But as soon as she was able, she started contributing a small monthly amount to her IRA and to her emergency fund. In a way, she was “saving” by aggressively paying down debt and eliminating late payment fees.
My keys to saving money? First, visualize your goal. Write down the amount you want to save, the date you want to save it by and, if possible, draw or clip a picture of what you are saving for — such as a car, education, or home. Saving money is a habit, and the way to achieve it is through motivation. Always save first before spending, even if only a tiny amount. Seeing your savings add up is empowering and gives you momentum.
If you’re a small business owner, you can also use this tip with your tax escrow account. Every time you receive payment, put a percentage first into your tax account before depositing it in your spending account. That way, when it comes time for tax season, you’ll have the liquidity you need to pay what you owe. TurboTax is a great tool for this.
When you feel overwhelmed by the challenges you are facing, creating a budget using the 50/30/20 rule is a great place to start. One reason it’s popular in the nutrition field is its flexibility. Instead of restricting certain foods, it focuses on counting the total number of macronutrients you eat. It works the same way with finances.
Start your new healthy habit today — both physical and financial!
For more tips, check out the financial guidance Intuit is providing to help you navigate these uncertain times and manage your finances.
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