THE BASICS OF HEALTHY SPENDING
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THE 50-30-20 RULE Just as you would refer to dieting as “healthy eating,” Manisha Thakor, MBA, CFA, refers to budgeting as “healthy spending.” The key to being financially healthy is to make sure you are spending and saving your income wisely.1 Manisha created a simple spending ratio to help stay on track. She recommends using the 50-30-20 rule.
Healthy Spending Pyramid 20% should go toward SAVINGS. 30% should go toward activities and purchases you WANT: restaurants, concerts, travel, and shopping. 50% of your take-home income (after taxes) should go toward the things you NEED to pay for: housing, transportation, food, and bills.
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To see where you are in this model, collect all your receipts and online transactions for one month and divide them into the categories listed below. Add the numbers in each column to see your total amount spent. NEEDS (50%)
WANTS (30%)
SAVINGS (20%)
Housing
$
Entertainment $
Emergency
$
Food
$
Hobbies
$
Intermediate
$
Utilities
$
Travel
$
Retirement
$
Transportation $
Shopping
$
Other
$
Fuel
$
Other
$
Insurance
$
Medical
$
Childcare
$
Debt
$
Other
$
Total Needs
$
Total Wants
$
Total Savings
$
To find the percentage, divide the column total by your total income and multiply by 100. (
/ Column Total
) x 100 = Total Income
Column %
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Here is an example for someone with an annual net income of $60,000: NEEDS (50%)
(
WANTS (30%)
SAVINGS (20%)
Housing
$
Entertainment $ 4,000
Emergency
$
Food
$
Hobbies
$ 5,600
Intermediate
$
Utilities
$
Travel
$ 6,700
Retirement
$
Transportation $
Shopping
$ 3,200
Other
$
Fuel
$
Other
$ 440
Insurance
$
Medical
$
Childcare
$
Debt
$
Other
$
Total Needs
$
Total Wants
$ 19,940
Total Savings
$
$19,940 Column Total
/
$60,000 Total Income
) x 100 =
33% Wants %
If your percentages are not close to Manisha’s recommended ratio, determine how you can make adjustments to move in the right direction. Consider using an online service like Mint to organize all your accounts in one place, categorize your spending automatically, create a budget, and track your progress.
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REFERENCE
1| Thakor, M. (2013). The beauty of a budget. MoneyZen.
Retrieved from www.moneyzen.com/earn/financial-advisor-insights-the-beauty-of-abudget