Senior Associate Financial Planner Jerin Young provides practical tips on how to better understand your spending habits by categorizing your spending.
Start by dividing your after-tax net income into three categories: needs, savings, and wants. 50% of your income should be allocated to your needs, 20% should be set aside for savings, and the remaining 30% will be available for wants.
The expenses in each category will vary from person to person. But generally, you’ll find things like:
- Home mortgage
- Car payment
- Minimum debt payments
- 401(k) contributions
- IRA contributions
- Other planned savings goals
The wants category represents anything and everything. It’s important to recognize your own priorities and lifestyle when breaking down expenses into these categories.
- Electronic upgrades
- Subscription services
Also, be realistic with yourself – don’t drill down too far in your spending habits if you know you won’t have time to break down expenses every single time. Or it could work best for you to skip sub-categories all together and stay at a high level and just focus on needs, savings, and wants.
Going through this process and setting up a budget in a way that works best for you will enable you to plan for your future and meet your long-term goals more effectively.
Visit our website at www.onlyworkforyou.com to find a wealth of information about financial literacy, including budgeting, and so much more.