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Power Budgeting: Are You a 'Perfect 15'

At the age of 30, Myka finally got it. She's got a budget. Previously, the mere thought of the "b" word made her want to dry heave. Today, by contrast, Myka is a Perfect 15. That is, Myka saves 15 percent of her annual gross income -- and her budget is what enabled her to achieve this seemingly out of reach goal. Myka now feels in control of and empowered by her money. Do you want to "be like Myka?" Then read on:

You may recall that we wrote about the importance of saving 15 percent of your gross (i.e. before-tax) income in our January column. While the exact mix will depend upon your personal circumstances, generally 5 percent will go toward your emergency fund and big-tickets items, and 10 percent will go towards your retirement. We also noted that establishing your end goal is a critical first step. So don't beat yourself up if you can't save 15 percent right out of the gate. Knowledge is power. If you're unable to save 15 percent of your gross income today, a budget is exactly what the doctor ordered.

Now, budgets don't exactly give most people the warm-fuzzies. However, most people don't realize that budgeting is really about spending money in the areas of life that bring you the most happiness. You worked hard for your money, right? So it makes sense that you would want to ensure that it is spent in ways that bring you closer to your life's goals. This is exactly what a good budget can do for you. To that end, we've come up with a powerful, yet incredibly easy to use tool that we call the "Power Trio of Budgeting." The purpose of this tool is to highlight what changes you need to make in order to be able to save 15 percent of your money for your future needs.

Here's how it works. After Uncle Sam takes his bite in the form of taxes, the average person has about 75 percent of their gross income left over to actually spend. (Note, if your tax rate is higher than 25 percent, you'll have less than 75 percent left over to spend). Enter the "Power Trio of Budgeting." That spending is done in three key areas: Future, Foundation, and Fun. We've already talked about Future expenses (a.k.a. your savings). So that leaves Foundation and Fun. Foundation expenses are the ones you can't avoid -- things like shelter, transportation and food. While you may not have flexibility about needing these items, you do you have flexibility on how much you choose to spend on them. Fun expenses are things you simply want.

The math reveals that after taxes, you're left with roughly 60 percent of your income to spend on Foundation and Fun expenses. Therefore, your key "budgeting challenge" will be to make sure your combined Foundation and Fun expenses are not too high, so that you have money left over to save for your Future. In the chart below we highlight the typical types of expenses that fall in each of these categories.

Foundation  Expenses 

  • Housing: your monthly rent OR mortgage payment, homeowners insurance, and property tax as well as other routine bills like utilities, phone, cable, internet.
  • Transportation: your car payment, insurance, gas, maintenance, monthly tolls, and parking if you drive and/or your monthly bus, train, or subway pass if you take public transportation.
  • Basic groceries/supplies: food, toiletries, cleaning supplies.
  • Debt repayment: any fixed payments on student loans or other debt (including credit cards).
  • Other Foundation: health insurance, non-reimbursed medical expenses, life insurance, childcare costs, charity, and ?ESSENTIAL? clothing.

Fun Expenses

  • Fun food -- take out, restaurants, coffees & snacks, dinner & drinks with friends, etc.
  • Fun clothing -- your "WANT" clothes, shoes, accessories, and jewelry.
  • Entertainment -- movies, concerts, CDs, DVDs, magazine subscriptions, books, newspapers, hobbies, etc.
  • Personal -- gym membership, facials, manicures, makeup, etc.
  • Other -- vacations, gifts, pets.

If you're having trouble saving 15 percent for the Future, we suggest you do a two-month "reality check." For two months, write down every single thing you spend money on. At the end of each month, review your list. The purpose is to see if you?re spending your money according to your life interests. Remember, the ultimate goal is to make sure that you balance today and tomorrow and are able to save for your future.

The Power Trio of Budgeting is an essential tool for managing your personal finances. It will make the difference between retiring in comfort, sipping an ice-cold beer on the beach, or having to work well past the age of 65. Learning to balance pleasure today with security tomorrow is the secret to becoming a "perfect 15." With the handy rules of thumb referenced in this article you -- like Myka -- can be on your way to owning your finances and owning your life.

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