An Easy Formula to Get your Money In Balance (Part 2)

(Be sure to check out and register for my upcoming Workshop, "Special Money Strategies for People 55+" on Monday, June 27th at 9:30am at the Plymouth Chamber of Commerce building. For more information and to register, please visit our registration page! )

In my previous post (An Easy Formula to Get your Money in Balance Part 1), I wrote about getting your money in balance by following a formula outlined in the book, All Your Worth, by Elizabeth Warren and her daughter, Amelia Warren Tyagi. I discussed the first part of the 50/30/20 formula: that is, to work toward getting your monthly "Must Have" expenses to be no more than 50% of your monthly after tax income. Today, I'll discuss the 30/20 parts of the formula.

Your Savings Goal - 20% of Monthly after tax income

Multiply your monthly after tax income (see previous post below for how to calculate this) by 20% and this is your monthly Savings goal. For example, if your monthly after tax income is $4000, your savings goal is 20% or $800. To get your money in balance, you want to save this 20% amount each and every month.

What constitutes Saving?

Of course it includes all the money you put in your savings account and your 401(k) or IRA every month. But, you get credit for Savings in other ways too. For example, if you are fortunate to have a 401(k) plan where your employer matches part of your contribution, you can count the amount of the match toward your 20%. Likewise, if you make extra principal payments on your mortgage you can include that amount too. Do not include extra payments on auto loans or student loans though. These are debt obligations on items that do not appreciate over time like a house (um...don't give up...your house WILL appreciate eventually. The same can't be said about your 2005 Honda Civic). Saving 20% does seem like a lot...but approach it like any goal and do your best to move toward it step by step.

Let's talk about two important uses for your saved money.... building an emergency fund and paying off credit card and other debt. If you have credit card or other debts (other than mortgage debt on your primary residence), you need this extra money to first pay off the debt and build an emergency fund. As the authors stress in All Your Worth, you need to pay off your past before you can save for your future. Debt steals money from your future and that is why it needs to be dealt with before you build your Savings. The one exception is an emergency fund. An emergency fund provides a cushion for you to fall back on when the inevitable things of life happen like needing new brakes or kitty's teeth cleaning expense. Without an emergency fund, you will have to use your credit cards for these expenses and you'll feel like you are never going to get your money in balance.

Here's what I want you to do

Every month, try to save 20% of your after tax income. If you have no emergency fund, pay just the minimum amount due on your credit cards and loans and use the saved money to build an emergency fund. Once your emergency fund is built (at least 3-4 months of expenses in a savings or money market account only), then use your Savings to pay extra amounts on your credit cards and other debts. And when that fabulous day arrives when you have your debt paid off, then use your Savings to build your retirement account.

What about the remaining 30% of Monthly after tax income?

Remember...this approach is the 50/30/20 rule. So, what about that 30%? This is your discretionary or fun money. Spend it on whatever you want. Buy that iPad, take that vacation, enroll in cooking school, order the HBO premium package. Do whatever you want with it. Spend it without guilt, without any dread. If you are in a couple, divide the 30% between you. Each of you should feel free to spend it on anything you want. No questions asked...no explanation needed.

If you are meeting your Must Have and Savings percentages, you can rest assured that as long as you MAINTAIN your fun spending at 30%, you will have your money in balance. Can you imagine what that would be like? You would feel in control of your money. You would know that your Must Haves were taken care of and your Savings were building. Moreover, you would be able to have some fun with your money and enjoy things worry free. If your income changes, be sure you recalculate your monthly after tax income percentages and maintain the same 50/30/20 split.

You can do this! It's fine to take your time and move toward these goals. You will be amazed how good you will feel. Start today and let me know how you are doing.