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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 post 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
- 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.
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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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March 28th, 2008 at 4:49 pm
I am going to add some really stupid, asinine financial behavior that keeps people in debt and poorer longer: they managed their credit debt while trying to increase their savings.
Yes. They put aside money instead of lowering their debt.
That is the most stupid, useless method of getting rid of debt faster. Plunk that savings money down on debt fast and in large quantities. Shed debt. THEN save.
My two cents in Canadian coin
James Chartrand – Men with Pens’s last blog post..Would You Use a Job Auction Site to Find Work?
March 28th, 2008 at 5:24 pm
Your Canadian coin is well spent if you spend it that way, my friend.
Let’s just do the 1st grade math. If you sock away $1,000 a month in a savings account that yields you 3% and your credit card debt is at 10% or even 15%, are you making money or losing it?
Even if someone needs to take on a second job, work more hours, cut spending here and there, they MUST lower that consumer debt.
To toss my American coin into the well, I’d like to add that debt is ok . . . as long as it is debt that contributes to building wealth and not eating Tacos.
March 28th, 2008 at 11:45 pm
Hi John,
I find it ironic how not that many years ago in real estate it was suggested that a mortgage was no more than 28-30% of your income. We know that got out of control and home owners were getting homes that took a huge percentage of their monthly income.
Here we are, going full circle. Unfortunately home prices got out of control and a lot of people don’t even qualify now.
And isn’t it funny how the word budget is the new “B” word…like it’s something bad.
This has been a great teaching post. Hopefully it’ll get lots of attention and bring people to take action.
Barbara Swafford’s last blog post..If One Is Good, Two Is Better
March 29th, 2008 at 5:30 am
Thanks Barbara. I really hope this information does get out there as I think it would help a lot of people . . . at least getting them to even *think* about a budget. Most people fly blind and where they end up they end up.
Yeah I guess it is the “B” word no one likes. No one likes to be told what to do or be limited in what they can do, especially when not at work.
The mortgage companies brought this on themselves (the poor market). They were the ones who created these unrealistic homes that made them money today but screwed themselves in a few short years, as well as their customers.
Anyway, I haven’t been to your blog in a few days so watch out, because here I come. Don’t you love CommentLuv?
September 24th, 2008 at 7:04 am
“I understand it can be difficult to buy a house acceptable to the Mrs. on a tight budget.”
Is this the fifties? Both genders insist on houses that are too expensive.
September 24th, 2008 at 1:50 pm
That’s a great point soelo. You’re absolutely right. We all get caught up in the emotional sense of buying a house we want and many times do the wrong thing because we want it so bad.
October 21st, 2008 at 10:11 am
You’re absolutely right, this is the perfect budget to buy a house in buget and perfect use of money , this money will help you in future.
November 19th, 2008 at 10:15 am
I have bookmarked this to refer back to later and dig rather deeply into…thank you for sharing this very valuable information with all of us.
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November 28th, 2008 at 8:09 pm
I agree with your comment to live below your means. Many have become so accustomed to get and have whatever they want that they are struggling big time in this worsening economy. To get used to what you really have to spend, use cash and stop using credit and you’ll quickly start to realize what you can afford and what you can’t. Life is much less stressful when you’re not always worrying about your debt!
ShortcutSleuth’s last blog post..8 Easy Ways to Save Money Without Changing Your Lifestyle
November 29th, 2008 at 10:33 am
Hi ShortcutSleuth – Yep, it absolutely is much less stressful when you don’t have to worry so much about your debt, isn’t it? Credit cards really should only be used for a couple purposes:
1. Emergency
2. To save money. For example, you’re in a store and the item you need is on discount for a couple of days but you don’t have the money. Use your card to buy it but be sure you pay it off before you’re charged any interest (or keep a small balance if you’re trying to build credit).
3. If it’s used to make you more money, like flipping a house or something.
December 7th, 2008 at 9:18 pm
I agree with you! Good point.
ShortcutSleuth’s last blog post..Home Organization Tips – Organizing Without Torture
February 11th, 2009 at 4:34 pm
Some great tips on how to setup a budget and great budget tips to live by. I think it has the great attribute of being easy to remember. A budget seems to almost be an overwhelming prospect for most people to setup and having something simple to follow helps.
KG’s last blog post..What is a Good Credit Score
November 26th, 2009 at 6:09 am
You got a really useful blog I have been here reading for about an hour. I am a newbee and your success is very much an inspiration for me. The first page doesn
January 28th, 2010 at 1:31 pm
Wouldn’t it be interesting to compare your rules to the generation who lived during the great depression. I’m a late baby boomer and my grandparents and all their friends had pretty much one rule. If you don’t have the money don’t buy it.
But alas, times are different and consumerism is what drives our existing economy, too bad it’s sagging right now…. more the reason to practice your guidelines.
Good article.
Mark
Mark @ credit cards ´s last blog ..About
January 30th, 2010 at 4:14 pm
Hey Mark, thanks for the comment.
Yes unfortunately we live in a world that seems to be built around setting us up to fail.
The logic of spending money seems to of changed over the years. It’s just too easy to spend it.
February 1st, 2010 at 7:12 am
Thank you for your great information. I personally think that keeping at least 6 months expense in your account before spending on others is important. I been practising that and it work well with me.
Thomas of http://budgetingandforecastingsoftware.org/cashflow-budgeting.php
February 1st, 2010 at 7:24 am
Hi Thomas, agreed. It really is a comfort knowing you have a nice reserve.
In today’s economy, it’s more important than ever. In fact, it might even be good to have more than 6 months because of the unemployment rate and how hard it can be to find a job.
February 9th, 2010 at 6:49 am
Yes, nowadays it seems that our wallet keeps on getting empty. Interesting article.
March 2nd, 2010 at 6:53 am
keeping to a budget plan is a must if you struggle to keep your fiancés in check. The strategy on the article is stop as you can move money to help with your mortgage from the right portion of income.
finance advice´s last blog ..Interest Only Mortgage Can It Save Me Money ?
March 4th, 2010 at 7:53 pm
Good tips on setting a budget. I wish someone would have driven this point home with me when I was younger. Separating your “needs” from your “wants” is another good tactic to help you live beneath your budget.
Home Loan Modification´s last blog ..mortgage rates
March 7th, 2010 at 10:19 pm
I been doing budgeting for companies for more than 20 years. All the points that you highlighted are very similar to what I practice in company budgeting. Personal and company budgeting principles are very similar and both aim to control over exposures to financial risks.
Thomas of http://www.budgetingandforecastingsoftware.org
March 11th, 2010 at 4:43 pm
Gotta agree with “home loan” above.. separating wants and needs is critical. I’d love to see more financial training in schools.. kids just don’t learn this stuff.. and parents often don’t know it to teach it!!
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