Achieving Financial Freedom

Do you find yourself often stressed out about money? If so, you are not alone. According to an American Psychological Association study completed in 2015, 63% of Americans were consistently “somewhat to significantly” stressed about money. The same survey showed that 31% of the participants indicated money was the number one source of conflict in their relationship.

If you are among the financially stressed, there are some established steps for getting on track. As painful as it might be, create a realistic budget that will help you set future financial goals. Carve out an emergency fund to avoid falling back in to the habit of accumulating debt. If you have debt currently, set up a plan that pays off the highest interest rate account first, then work your way down to the lowest rate account.

Guidelines for saving, spending, and debt can be helpful tools for crafting a realistic budget. Guidelines are not rules; adjusting them for your own situation will be necessary. If you spend more on one item and less on another you are probably successfully managing your budget. However, if your spending is consistently higher than the guidelines suggest, you might want to create/update your budget and see if there are ways to cut back.

Saving Guidelines:

The most often recommended range for savings is 10-15% of your gross pay. Remember this is your pay before any deductions. If your income is $4,000 per month, your goal should be to save $400-600 per month. This amount includes contributions to your 401k and IRA, as well as your cash cushion. When we talk about saving, we always use the same rule of thumb: “The more, the better.”

Spending Guidelines:

Use these spending guidelines, adjusting where necessary for your personal situation.

Housing: This is the largest chunk of your spending budget in most cases. Housing includes your mortgage, insurance, taxes and home improvements. Your total payments for these expenses should be between 28-31% per month of your take-home pay. Take-home pay is after any deductions.

Transportation: Transportation costs factor in your auto loan payment, insurance, gas, and maintenance. The guideline for these expenses is 18-23% of your take-home pay.

Food: This essential part of your monthly budget should consume 10-15% of your take-home pay. This category includes your grocery expenses, as well as eating out. Dining out is an area where individuals often find they can save the most money in their budget. It is a good item to focus on when you are looking to cut back your monthly expenses.

Personal Care Products and Services: This is another area to focus on when reviewing your budget. The guideline for this category is 4-7% of your take-home pay. This category includes household consumables, like cleaning supplies, personal care products, laundry detergent, etc.

Entertainment: Whether you see a movie, buy a new book, or attend a play, the total of these expenses should be less than 4-5% of your monthly take-home pay.

Debt Guidelines:

Consumer debt is debt used to fund consumption, rather than investment. Consumables decrease in value over time—think flat-screen TV, rather than house. There are no guidelines for percentages of consumer debt as part of your take-home pay, but your budget should aspire to pay off all consumer debt each month.

When qualifying customers for a mortgage, loan officers typically want to see 45% or less of your gross pay directed to all debt payments. That guideline includes your mortgage, auto loan, and all consumer debt.