JANUARY 9, 2014 BY
If you haven’t been following along in the YVSC Live Simply Challenge, read all about it here.
This post submitted by Sam Jones, YVSC Advisory Board
Living Simply and Personal Finance are terms not often found in the same sentence. Personal finance is everything but simple, right? Beyond the inherent oxymoron, some would argue that choice is not always an option especially when we are living hand to mouth with every paycheck. I’m going to push back on that concept and suggest that choice is always part of the equation. Living a simple financial life is about personal discipline and planning, whatever your level of income. Simplicity arrives when that nagging sense of not having enough money slowly dissipates and it all comes down to modeling your own spending behavior to accommodate your current income. If your income increases, you can make adjustments to the spending model. We call this living within your means. You’ve heard this before – we do not plan to fail, we just fail to plan, so here’s a quick and simple financial plan for everyone to live by in 2014.
The 50/20/30 rule
50% of your gross income (no more, preferably less) should go to essential expenses. These are the things we must pay – taxes, rent, food, gas, utilities, etc. If your essential expenses are above 50% of gross income measured annually, then you are living beyond your means. You’ll need to make some tough choices; sell your house and rent? Refinance your mortgage? Use public transportation more? Cut your tax bill (see below).
20% of your gross income should go to financial stability. This is your savings and investment pot providing solvency in the future. Do it every month. Do the math. Do it. Deductible contributions to an IRA or company 401k plan save you tax dollars ,don’t forget. Parents with children, start a Colorado 529 plan, contribute to it and get the state income tax deduction. Contribute to a Health Saving Account (also deductible) for yourself. Pay yourself not the IRS! Extra money available goes into this bucket if you are staying within the spending limits.
30% of your gross income CAN go to lifestyle choices. But keep it limited to 30% or less. This is the fun stuff; Eating out, a ski pass or that sick pair of Armadas, massage or personal trainer. Maybe the trip to Sonoma or biking in Fruita. 30% is the max however and a reward (of sorts) for sticking to your spending model with the first two categories. If you don’t have enough, this is the category that becomes discretionary.
There ya have it – a personal financial plan for each and everyone one us. Work hard to follow the rule, measure your spending and stay disciplined. In one year, you’ll find your financial life has become quite simple.