You may not love tests, but we have one for you to start off your Wednesday. Our budget test contains five simple questions. You may not be hitting these five points we recommend, that’s okay. Even if you can only answer yes to one or two questions, you are doing well. Read on, asses where you are at and commit to improving. If you can answer yes to all five, you are a budget rock-star.
1. Can You Spend $100 Or Less Monthly On Groceries Per Person?
Dave Ramsey (financial guru) suggests a $250 monthly budget for a family of two for all groceries and eating out. We would suggest putting the ‘going out’ budget in a separate category that won’t be considered a necessity and shoot for $100 per person for groceries. This seems like a really small amount to a lot of people but if you shop intentionally and try to buy inexpensive items this is doable. The key is eating everything that you buy and avoiding waste whenever possible.
2. Is Your Rent or Mortgage Below 30% Of Your Total Income?
There are a few reasons why keeping your mortgage or rent below 30% of your income is a good idea but the most significant is that banks are looking for a certain debt to income ratio when you apply for a mortgage. A bank will often want to see that 28% or less of your income is wrapped up in your living expenses (mortgage, taxes and home owners insurance). If you are above this threshold it may be impossible for you to get a mortgage. Also it is a good rule of thumb to keep in mind that you shouldn’t be paying more than 36% of your monthly income toward debt. This includes all debt, mortgage, credit cards, auto loans etc.
When you’re renting it’s a good way to prepare your budget for home ownership to keep your rent below 30% of your income. When you go to buy a home you won’t be able to have a mortgage that takes more than 30% of your income so get used to it while you’re renting.
3. Do You Put At least 20% Of Your Income Toward Financial Goals Such As Savings Or Debt Repayment?
With 20% of your income going toward financial goals insures that you’re continually moving forward. Whether your financial goal is becoming debt free, saving up for an adoption, a house, or planning for retirement, keeping 20% earmarked for these steps will keep you financially responsible and prepared. When the average savings rate in America is currently 5.5%, if you can put 20% toward your long term goals you are doing great.
4. Do You Spend Less Than 50% Of Your Total Income On Essentials: Home, Utilities, Food, Transportation Etc?
To see some examples of how this works in real life situations visit this website: learnvest.com where they take you through the 50/30/20 rule with budgets of varying levels of income. With only half of your income going toward necessities you’ve left a solid 20% (or hopefully more) available for your financial goals as well as a comfortable budget for the fun stuff. The 50/30/20 principle suggests 50% for necessities, 20% for financial goals and 30% for non necessities that you enjoy (gym memberships, entertainment, eating out, vacations etc). Think right now about 30% of your budget – with the rest of your budget in check doesn’t that feel like plenty of money for ‘fun?’
5. Do You Give 10%?
It is freeing to give to organizations or individuals you connect with. Give it a try! Giving away money has several benefits including:
- It increases your happiness.
- You are contributing to something you feel is important.
- It releases you from having an obsession with money.
We would consider this 10% part of the 30% if you were looking for where it fit into the 50/30/20 model. If you feel strongly about giving but don’t put it into your budget it will be the first sacrifice you make each month. Try and make it a priority.
If you are willing to ask yourself these questions and work to get to yes your financial situation is going to improve. It isn’t easy but everything worth having in life is challenging. We are here to be a resource for you so let us know how we can help.
How did you do? How can we help you get to 5 out of 5?