Join Scott and Laura as they discuss strategies for budgeting amidst emergencies and emergency preparedness, as well as ways that they can serve as peace of mind and permission to safely spend.
Laura is one of our founding team members, who has worked with hundreds of 3rd Decaders on reclaiming their lives through sound financial decision-making. As many of us are seeing a change in our hours, and in some cases even job loss, this year has been a wakeup call to many individuals living paycheck to paycheck. When you have an emergency savings in place, it allows to reduce some of the panic from uncertainty or unexpected changes. And more importantly than having a budget, is actually tracking how you stick to it. Budgets can be liberating, and allow you the peace of mind for when you do want to make a larger purchase – knowing that you’ve planned for it and that it won’t throw you off track.
Resources: What Is the 50/30/20 Budget Rule?
Preview:
"50%: Needs
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities. These are your "must-haves." The "needs" category does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.
Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.
30%: Wants
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. Anything in the "wants" bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of getting tickets to the game.
This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Honda, or choosing between watching television using an antenna for free or spending money to watch cable TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
20%: Savings
Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making IRA contributions to a mutual fund account, and investing in the stock market. You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.
Savings can also include debt repayment. While minimum payments are part of the "needs" category, any extra payments reduce principal and future interest owed, so they are savings."