By Matt Bell, Crosswalk.com
I'm a strong believer in the use of a budget. It's the most helpful tool I know of for wise money management. As you get started with this powerful tool, a logical question is, "How much should I spend on food, fun, and all the rest." That's why I developed detailed recommended spending guidelines for one-, two-, three-, and four-person households across nine different annual household incomes.
Set Your Financial Priorities
You'll see that I start with generosity, savings, debt elimination, and investing before getting to the spending categories. One of the most important keys to wise money management has to do with setting financial priorities. I've found that giving, saving, getting out of debt, and then investing a portion of your income before deciding how much to devote to cars and clothes and everything else is the way to go. When people flip the equation and put lifestyle spending first, that usually leads to debt. When spending comes first, people just seem to have a tougher time living within their means.
Set Your Monthly Money Targets
You'll also see that the plans I put together are ideal plans in that they show no debt other than a reasonable mortgage. If you have credit card balances, vehicle loans, student loans, or any other type of debt, you'll have to spend less in some other categories until those debts are wiped out.
By "reasonable mortgage," I've found that keeping housing costs to no more than 25 percent of monthly gross income is a good benchmark. Housing is typically a person's biggest expense. Limiting that expense to 25 percent of income helps make sure that money is available for generosity, saving, and investing.
In some parts of the country, you may have to devote a higher percentage of income to housing, such as parts of California or the east coast. But I don't recommend spending any more than 30 percent, even in those areas. And again, that means you'll have to spend less in some of the other categories.
Of course, state income and property taxes vary by state, which means I had to use averages in my recommendations. So, compare what you're actually spending in these areas with my recommendations and adjust accordingly
Complete Your Cash Flow Plan
Try filling in the "Now" and "Goal" columns of a Cash Flow Plan, which you'll find on the same page on my web site as the recommended spending guidelines. Put estimates for what you're spending today in the "Now" column. Then use the recommended spending guidelines to help you fill in the "Goal" column, aiming for a plan that shows total monthly income minus total monthly outgo equaling zero.
Next, transfer your goals to the top row of the Cash Flow Tracker. Now you know the targets you're aiming for as you track your spending. Of course, you can use the same information to create budgets with electronic tools like Quicken, Mint.com, and others.
Hitting the targets doesn't require obsessive frugality, but it does require spending smart. There are lots of articles already on my site, and plenty more to come, on how to do so in each of the spending categories.
Matt Bell is the author of three personal finance books published by NavPress, including the upcoming "Money & Marriage: A Complete Guide for Engaged and Newly Married Couples." He teaches a wide variety of workshops, including the MoneySmart Marriage workshop (www.MoneySmartMarriage.net) at churches, conferences, universities, and other venues throughout the country. To learn more about his work and subscribe to his blog, go to: www.mattaboutmoney.com.
Publication date: February 16, 2011