MSN Money Columnist Liz Weston is out with a new book “The Ten Commandments of Money: Survive and Thrive in the New Economy.” It’s a refreshingly no-nonsense read that steers clear of superficial advice like “clip coupons, get rid of the cable” and cuts right to the chase with simple formulas to get your finances in order.
Weston provides real world parameters for your budget so you don’t get off track. Her guidelines act a bit like those bumpers that give my kids an advantage in bowling — in short, you may not “strike” it rich, but you won’t end up in the “gutter.” (Bad pun intended.) Weston suggests you divide your income this way: 50% needs, 30% wants and 20% savings. She claims it works for every income in virtually every situation.
First, figure out your monthly pay after taxes. If you have items that your employer takes out of your paycheck — 401(k) contributions, health insurance premiums, union dues – then add those back into the paycheck number. Gather your monthly bills, checkbook and credit card statements and sort your expenses into three categories: needs, wants and savings. Weston defines needs as any expense that could cause an immediate crisis if it’s left unpaid: housing, utilities, food. Thus the person who earns $3,000 after-tax should spend no more than $1,500 on needs; $900 on wants; and put $600 in savings. (Any loan payments above the minimums due go into the “savings” category.)
When I applied the formula to my budget, it came out like this: needs 30%, wants 20%, savings 50%. Our savings are skewed higher by two goals: We want to pay for four years of college for our three daughters, and we’d like to retire a little earlier than age 65. (I doubt I’ll ever stop working, but I’d like to be free to work on more projects where the payoff is personal rather than financial.)
I was able to figure out my ratios in about five minutes using a report from my budgeting software, mvelopes.com. (I looked at the last 12 months of spending so I wouldn’t miss payments I make quarterly or annually.) Do a reality check for your finances: Go through the steps above and try to figure out if your budget fits Weston’s ratios. If you realize you have no idea where a good chunk of your money has gone, it’s time to identify the black holes in your spending. Get a budgeting tool. Mvelopes is a subscription tool, but there are lots of other free tools out there, such as Mint.com.
Do you use a budgeting tool? What works for you and why? How do you divide your spending among wants, needs and savings?