Eventual overspending is not really a choice most people make. It just happens when ones “wants” supersede the “needs”. The challenge most people face on a day-to-day basis is to find a way to save money without going into debt.
With Consolidated Credit Counseling Services people can learn to use the “50-30-20 Budget Rule” to save money faster. This rule was coined by Amelia Warren Tyagi the daughter of Elizabeth Warren (Harvard bankruptcy expert). Elizabeth has also been credited by TIME Magazine as one of the most influential people in the world today. Amelia’s rule has been adopted by many and was also written in a book co-authored with her mother. Their book is “All Your Worth: The Ultimate Lifetime Money Plan”.
Here is what the rule is about and how it can help you save money faster. The best way to manage your finances is to follow four basic steps:
First Step: Evaluate Your Income after Tax Deductions
Tax deducted from your income should include Social Security, Medicare, State and local tax. The amount left after deduction of all these taxes is the actual income. Usually for employees it’s easier to figure out tax deductions, because most companies pay wages after-tax deduction. For self employed people, the ideal thing to do is to deduct all business expenses and business related taxes. The amount left is the actual money earned from the business.
Step Two: 50% Maximum Value for Needs
Make a budget plan for things you need to spend on within the month. Then review the plan, and take note of the amount you have assigned to “essential” requirements. These should include housing, groceries, car insurance, health insurance and utilities. The total amount assigned to these should not exceed 50% of your total income (i.e. income after deduction of taxes).
In order to make the budget appropriately, it is important for one to sort “needs” and “wants” correctly. Without understanding the difference between both, it is impossible to make the right budget structure. A “need” is a payment that has severe impact on ones quality of life. It can include necessities like medicines, car repairs and house maintenance. A “want” on the other hand is a payment that one can do without. For example, the television cable, excess clothing, excess shoes and other luxury expenses are wants, not needs.
People that use their credit cards often face a dilemma when it comes to differentiating needs from wants. When one cannot get out of a loan taken on the credit card, the payment is a no longer a want; it becomes a need. This is because the unpaid loan impacts the credit scoring negatively and comes with consequences.
Step Three: 30% for Wants
Remember that it’s important to differentiate between needs and wants. Try not to get carried away with the 30% allowance for wants. It’s permissible to buy a beautiful pair of shoes and have a mean at the Italian restaurant once in a while. At least once in a month is not such a bad idea. Besides, you can also go for unlimited internet and text messaging schemes to have a social life.
However, refrain from fooling yourself into believing that your wants are your needs. There is a separate portion for needs.
Step Four: 20% for Saving and Debt Repayment
Assign 20% of your income (after deduction of taxes) for savings and repayments of debts. Debts can be student loans, car and house loans. The savings one needs to put in include retirement accounts and emergency funds.
At the same time, saving also involves keeping a close eye on utilities. Make sure that electricity, gas and water bills are within a particular limit. This helps one to stick to the saving plan and eliminate unnecessary wants.
If You Need Extra Help
Sometimes, sticking to the 50-30-20 rule becomes almost impossible. You might need some counseling on debt management, credit and housing counseling or how to manage personal expenses. This is why Consolidated Credit Counseling Services has become a very resourceful helper.
About The Author:
Shannen Doherty is a financial writer associated with many finance related groups and communities. She writes on various financial topics such as personal finances,debt , auto loan etc. To get more information on debt: www.consolidatedcredit.org is only a click away.