Budgeting 101: A Smart Plan That Keeps You Safe & Allows For Wealth Building
Article written by John
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What’s that the title said? Did it say there’s a plan I can use to play it safe and build wealth at the same time?
This budgeting plan won’t make you wealthy, but it will optimize your position for creating wealth while setting you up for retirement even if you don’t hit the jackpot.
It also will provide protection during a slow economy when people hurt for money.
I was inspired to write this article because A) I know this stuff and B) I just finished reading an article on CNNMoney.com which left a confused grin on my face.
The link I clicked on to read the article was entitled Making A Budget.
Sounds great, right? Well it taught me nothing when it comes to making a budget.
So here’s the budget I know and love.
The 40-30-20-10 Budgeting Rule
The formula I like is very simple and is no big secret. However, it can be a little difficult or take a little time to reach if you’re in A LOT of consumer debt (credit cards, loans, etc).
It’s called the 40-30-20-10 rule and is based off of your take-home pay, not gross.
- 40% of your income can be used for regular living expenses (clothing, dinning out, medical, and other expenses)
- 30% of your income can go toward your mortgage
- 20% can go toward consumer debts (credit cards, car payments, loans, etc.)
- 10% should be tucked away for savings and investing
I’ve seen variations of this rule. Some people change the strategy and make 40% savings only and 20% allowable for regular living expenses.
The problem I have with that logic is saving money is not the same as creating wealth. Also, I mean c’mon – we want to live a little. Therefore, I stand by letting 40% of your take-home pay go towards having fun.
This breakdown may look a bit strict, and it is. If you have no budget in place you’ll be flying blind (like I feel when investing in the stock market). What it also resembles is living below your means.
Wait. Let me repeat that.
You should live below your means. That is the mentality you should have when creating wealth, not “living within your means.” Do you see the difference? Living within your means is like saying, “I spend all the money I got and I don’t spend any money I don’t got.”
Well . . . that doesn’t fly with me. I prefer to say, “I spend some of the money I’ve got and save and invest the rest.”
2 Rules To Follow
Consumer Debts
You must, absolutely must, get your consumer debts under control. If you are in major credit card debt you need to come up with a plan to reduce this. Credit card and consumer debts should never be over 20% (maybe 30% at most) of your take-home pay.
Housing Debts
The housing market has been crazy lately and I understand it can be difficult to buy a house acceptable to the Mrs. on a tight budget. If you must spend a little more than your 30% cap I allow you for your mortgage, then that money must come from your 40% allowable expenses. It should never come from the 10 or 20 percents.
This is a strict budget, yes I know. But what successful budgeting plan isn’t?
If you can stick to it, you’ll find that you have set yourself up to be safe when the economy slows down and positioning yourself to be a prime candidate for creating wealth.
Here’s why:
- When the economy slows down and your paycheck shrinks while gas prices soar, you’ll be ok because you’ve left yourself a little breathing room.
- Your credit will be in great shape and allow you to leverage other people’s money to create wealth for yourself.
- Even if you never win the jackpot you’ll have a nice savings to live off of when you retire and not have to count on social security.
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