An Easy Formula to Get your Money in Balance (Pt. 1)

When I hear people complain about their money it is rarely about how much they make. Sure, everyone would like to make more. At one time or another, we have all fantasized about getting a big raise or winning the lottery.  Generally, though, that isn’t the real issue. What is really lurking behind their complaint is that they feel they can never get their money in balance. There always seems to be not enough…not enough to save, not enough to have fun with, not enough to have the things that they want. Do you feel like this sometimes too?

My “aha!” Moment

My dad loves to say that “no matter how much you make, there is nothing left at the end of the month.”  That seemed kind of crazy to me until I slowly built up my career …and paycheck…over the years. I realized he was right. It seemed the more I made, the more stuff seemed to come into my life that needed care. I remember the exact day about 10 years ago that I came to my senses about balance. I was sitting at my desk writing checks…checks for mortgages, checks for cleaning people, checks for people to cut the grass. It went on and on. I realized that I LOVE cutting the grass…I should be doing it myself. But, I was too busy on a Saturday writing checks to do it. How ridiculous! I needed to get my life…and my money… in balance.

Strategies for Balance

There are many strategies for doing this. Everyone needs to find the one that works best for them. I have come to love the 50/30/20 formula championed by Elizabeth Warren and daughter, Amelia Warren Tyagi in their wonderful book, All Your Worth. It is so crucial to get your money in balance. As they correctly point out, “Once your money is in balance, you can stop worrying about it. Managing your money becomes automatic. And so it moves into the background of your life where it belongs.”

Step 1: The Must Haves

Step one of the formula is to get all your Must Haves (the things you need) to take up no more than 50% of your MONTHLY AFTER TAX income.  For example, if your monthly after tax income is $4,000, then you should strive to bring your Must Haves to about $2,000 a month.

What’s included in the Must Haves?

Two things:

1. expenses for your basic health, housing, safety and
2. expenses you are contractually obligated to make.

Examples of “health, housing ,safety” expenses include: mortgage/rent; real estate taxes, auto/home/health/life insurance; utilities, basic food consumed at home, basic clothing, and similar expenses. It doesn’t include cable, cell phones, and items like that which SEEM to be a necessity but really are not. Examples of “contractually required” expenses include: car loans, student loans, personal loans, and alimony/child support.  Basically, they include expenses that you are required under contract or the law to make. Do not, at this stage, include your credit card payments. We’ll deal with them later.

Add up all of your monthly Must Have costs and see how close they are to 50% of your monthly after tax income. If you are at 50% or less, congratulations! You are on your way to having your money in balance. If you are at 60% or 70% or higher, you are having trouble affording your life.

Here are some steps you can take to work yourself toward 50%

Bring down your mortgage payments by refinancing to a lower interest rate.  Take higher deductibles on your insurance policies to save money. And shop around for insurance…check out other companies and plans when your policies come up for renewal.  Pay off your car loan…or even sell your car, pay off the loan and buy a cheaper car for cash. Get rid of the gym membership you really aren’t using and take walks around town with your family instead.

Take a look at ALL your monthly Must Haves and see what you can do to save money. This will take some time and effort but it is worth it! If you can’t get below 70%, you will have to take some bigger steps like selling your home and renting. The truth is you are overextended.

It may take some time to get to 50%. It’s a marathon not a sprint.  And as your income grows, do not let your Must Haves grow too much. Remember, regardless of your income, keep your Must Haves to 50% of monthly after tax income and you’ll be in balance.  Next time, we’ll look at the formula for your savings and “fun money."

To learn more tips, visit Val online at http://www.valbaumann.com.