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We have our Founding Fathers to thank for our great nation’s independence and this week, we celebrate. With a liberating spirit in the air, you, too, can draft a personal declaration for financial freedom. The first step? Establish a healthy financial lifestyle by sticking to the 50-30-20 rule. We’re not saying that you should return the fireworks or red, white and blue face paint. Budgeting doesn’t mean that you have to spend less; it’s about knowing where your money is going.
Divvy up your after-tax income into three categories – needs, wants and savings. Target spending 50% towards your needs (think food, mortgage or rent and utilities), 30% toward wants (think 4th of July party supplies) and save 20%. For a quick check, take note of how much you are currently savings to 401(k)s or other employer retirement plans, IRAs, investment accounts, bank savings and/or anywhere else you may be stashing money away. If you are saving at least 20% of your after-tax income, then your current spending habits are healthy.
Not saving 20%? Take a closer look at how you are spending your money and consider using an expense tracker to help capture everything. Or, look into budgeting tools like Mint to track and categorize your spending. Then, organize your expenses into two categories: needs and wants. If you’re like most people, your “wants” allocation may surprise you and there are likely simple changes that will go a long way. If nothing else, knowing how you have been spending will make you more aware of mindless credit card swipes and your spending habits will start to change. If you are overspending on needs, take a look at what might be eating into your retirement nest egg (i.e. housing or car expenses).
Saving 20%? The 50-30-20 rule is a useful guide if you are just starting out. So, before sending out invites to the BBQ, use the chart below to see if your cumulative savings are on track. After all, your current spending will not reflect your previous habits, but your nest egg will. If your cumulative savings are not on track, work with your financial advisor or use an online calculator to determine how much more you will need to save to catch-up.
Saving 20% and the nest egg is on track? Throw on your sunnies and enjoy your summer bash! You are guilt-free to use your extra cash to splurge on an oversized swan pool float or you may choose to dump it into your savings bucket to get to financial freedom faster.
Just be sure to avoid sneaky little lifestyle creep. In other words, don’t let your lifestyle grow in exact proportion to your income. Rather than spending more with salary increases or bonuses, save them.
Happy Independence Day!