The money resolution to keep
Published 6:42 pm Friday, December 17, 2021
By Shawn O’Brien
Creating a solid financial plan should be at the top of your New Year’s resolution list. Intentional budgeting will be more important than ever, as 2022 could bring with it high inflation rates, possible changes to the tax code, a struggling supply chain, reinstated student loan payments, and more as the world recovers from the pandemic.
One way to accomplish this is by adopting a 50/30/20 budgeting strategy, a simple method to allocate your take home pay to ensure there is some left over for savings. This rule helps build a foundation to save for retirement, education, a down payment on a car or house, an investment opportunity, or any other future financial goal.
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By doing some easy percentage calculations, you can break down your monthly income into three main categories — needs, wants and savings.
Needs are essential. This category includes items such as your rent, mortgage, groceries, health insurance or health costs, utility bills such as gas or electricity, car payments, or other minimum payments that come due every month, for example: credit card or loan payments.
Wants are non-essential. You may think that because you spend within this category on a regular basis that some of these items may be classified as needs, but they often are not. Going out to dinner, ordering take out, buying a new phone, going to a concert, or sporting event, vacations, etc., should all be considered wants.
The importance of savings cannot be measured. Whether it is a down payment on a house, paying off debt, education costs, a car repair or home improvement project, a vacation or investment opportunity, building your emergency or retirement fund, when you have savings, you have options and financial flexibility. Here is where the 50/30/20 strategy comes into play to help you save. With 80% going toward needs and wants, that leaves you with 20% to allocate for savings while also helping to set financial goals and encouraging you to resist dipping into the 20% for other reasons.
Categorizing where your money is going can help you set a financial plan in motion. When you measure or track your spending habits and cost of living, you may see opportunities to make reaching goals easier.
Opportunities to curtail spending habits may become clearer when all of your spending is being categorized. Seeing where your money is going each month can motivate you to change bad spending habits.
Having any sort of plan with your money that may lead to a positive end result can give you a feeling of not only accomplishment but also relief in knowing progress is being made toward living a less stressful financial life.
To get started, it may be a good idea to gather some of your financials from the last few months. Check out your bank statements, however you receive them. That should give you a good snapshot of where your money is going. If possible, transfer some of your data to a spreadsheet so you can track expenses.
You may choose to start some simple calculations to see where your 50/30 split is. Look at your Needs list — groceries, utilities, etc. Are you allocating more or less than 50% already? Are you spending more than 30% on wants? Here is where you can make changes if necessary — cutting back on certain spending. Remember, anything other than needs and wants is going toward your savings initiatives, whatever they may be.
The 50/30/20 rule may be a helpful way to reach financial goals and, most importantly, to encourage an examination of spending habits to help you save. Depending on your circumstances or the cost of living in your area, it might not work perfectly for your financial situation. But it could be a great place to start thinking strategically about your money.
Shawn O’Brien is the EVP, Consumer and Business Banking Group Executive at Atlantic Union Bank.