Do you find yourself wanting to get out of debt, wanting to build a cash reserve, or struggling to save money for the future? If you find yourself struggling with any or all of these problems you do have some options to help yourself out. The key to successfully accomplishing your goals is planning and budgeting. Many individuals are able to climb out of the hole simply by planning and budgeting. If you are the type of person who has no idea how much money they have, how much they owe, or where there money is going; then these tips are meant for you!
The first questions you need to answer is: what is your monthly after tax income? Let’s suppose that you are like many Americans and are in the $45,000 income range. This will put you in the middle tax bracket (25%, which actually ends up being 16.5% after standard deductions, here is a link to help you calculate your federal income tax http://www.moneychimp.com/features/tax_brackets.htm) and let’s suppose that state and local taxes combined are 9% (this will vary from state to state and city to city! You must find out what your individual state and city are). You will also be paying 4.2% (previously 6.2%) tax for social security and a 1.45% medicare tax. So now let’s compute your total tax. 16.5% + 9% + 4.2% + 1.45% = 31.15%! That is right a little over 31% of your income is going towards taxes! This means that your original salary of $45,000 is only $30,982 after taxes! This means you only have $2,581 a month to live on.
Before you can fully plan you need to answer the following questions: How much debt am I in? What are the sources of my debt? What is the interest rate and balance on each type of debt? What are my minimum payments per month? Many of you will have multiple debts and multiple sources of debt. The best thing you can do is make a list of these debts (you can do everything on paper or you can choose to use a spreadsheet such as Microsoft Excel). An example maybe the following: $1500 in credit card debt from Chase, $20,000 in student loans from Wachovia, and a $5,000 car loan from your local credit union. The best thing you can do to help yourself is to make list of these debts. After identifying the amounts you now want to figure out what the interest rate is and what the minimum payments are: for example Credit Card from chase $1500 outstanding balance, $30 minimum payment, 19.5% interest rate. $20,000 student loan, $350 minimum payment per month at a 6% interest rate. $5,000 car loan, $210 minimum payment per month at a 5% interest rate (you may have much more debt, less debt or no debt, but they key is to map it all out). The information you gather here is that you automatically have $600 of your after tax income per month going towards payments towards debt and you must set this money aside!
Now let’s go back to our monthly income of $2,581. Subtract your $600 in debt payments per month and you are now down to $1,981 per month! Before we can even talk about savings you need to figure out some other consistent monthly expenses and bills such as mortgage/rent, cell phone, electric, gas, water, car insurance, cable, internet etc. Let’s assume the following: $800 a month for rent or a mortgage (this is where having a room or a spouse can save you a lot of $!), $80 a month for cell phone (if you are higher than this, do you seriously need more than 50 rings tones, 20 games, and a $35 a month data package when you have internet at home?!). $200 a month combined for utilities (gas/heat, electric, water, trash removal). $100 for car insurance per month (even if you pay yearly, every six months or quarterly break this into a monthly expense and set it aside!). $120 a month for cable and internet (if you are paying more than this you should really call your cable company and ask them to give you a promotional rate! Also if you are really high on here do you really need all the premium channels and do you really need to rent 10 movies a month on demand at $5 a pop?). You will likely have monthly bills for other items as well, let’s put that number at $200. Now let’s add up our expenses we have $800 + $80 + $200 + $120 + $100 = $1300! Let’s go back to our monthly income we had $1,981 now we need to subtract $1300 giving us a total of $681.
Of course your expenses are not over you still need to eat, be ready for an emergency (a car accident, illness, etc.), irregular events (uh oh car inspection is coming up!). Remember the last time your car had problems? Of course you do that is why you have $1500 of credit card debt! You still need to have money to go out, your significant other’s birthday, that vacation, etc. I would say budget $400 for food, put $100 away each month for irregular events such as a car inspection, and $50 away every month for emergencies. This is an additional $550, you are now down to $131 a month after all of these expenses. You still need to build a cash reserve good for 3-9 months of expenses, save for the future, and buy clothes, get hair-cuts etc. with that remaining small slice. You have reached a problem your monthly expenses are almost equal to your income. You have so little money left you cannot afford to build a buffer or save for the future. Game over?, no simply go back and re examine what you are spending your money on every month. $800 is a lot of money for an individual to pay for a place to live every month. You can look into getting a roommate or moving to a cheaper location (keep in mind moving is stressful and cost money). Look at your cell phone bill of $80, go back and get rid of some of your features and options try to reduce it $60 a month. Cable and internet, get rid of premium channels and call for a special rate, get this down to $80. Look into your car insurance, $100 a month (do you really need all of that coverage?) look to pay less say $75 a month. Maybe you can lower the heat a little, blast the AC less and cut your utility bills to $160? Let say you are able to make the following cuts $650 in rental expense, $60 for cell phone, $80 for cable and internet, $160 for utilities, and $75 for car insurance. Now your savings $150 + $20 + $40 + $40 + $25 = $275! Now let’s look at your income after expenses now $131 + $275 = $406.
Now this is more reasonable. I would suggest putting $50 aside for hair-cuts and personal care a month, $50 for gifts and occasions every month. Limit your going out spending to $60 a month. Now you are looking at an additional $160 a month in expenses. You are down to $406-160 = $246 a month after expenses. I would suggest putting aside at first $50 a month to go towards a short term cash buffer (keep building this until you enough for 3-9 months of expenses! and do not use this money for any reason only if you lose your job or become disabled.) Now put aside $50 a month towards a long term savings plan (you can use a 401 K if you qualify at work do it! Money is taken out pre-tax (you are only losing $34 of after tax pay) and you employer may match your contributions (Free Money)! This leaves you with $146 a month. I would suggest setting aside $75 for other expenses of your desire (maybe a dinner out, a ball game, a gym membership, etc.). The other $71 I would use towards paying off debt. Focus on your highest debt item first (your credit card!) and use the extra $71 a month to pay off this expense. After a time you will be credit card debt free! You will gain an extra $101 a month of extra income since you now no longer have a $101 expense on your credit card. From here dedicate an extra $30 a month to your cash reserve, an extra $30 towards long term savings, and the remaining $41 towards your car loan (or the next highest debt). As you begin to pay off all of your debts you will see that your expenses will decrease and your extra income left over will rise. As this happens you should focus on continuing to boost your savings and paying of more debt. I do not recommend raising your standard of living (dedicating a larger portion of your income towards expenses) until you have at least a 3 month cash buffer, no credit card debt, and at least $5,000 of long term savings.
Budgeting and planning is not easy. It is very easy to be motivated at first then quickly lose interest or become discouraged. You must be disciplined and follow your budget. It will take some time to dig out. In fact it could take a few years, but it is important that you do it. Just be wise, calculate all of your expenses and dedicate your income towards specific expenses and goals. The best thing you can do when you get your paycheck is to mentally spend it towards all of the budgets you outlined. If you are overwhelmed talk to a family member, a close friend, or someone you trust. This is something you must do yourself no one will do it for you. Good luck and may you live long and prosperous!