Debt Management

A Simple Formula to Control Your Spending

BY Anne Johnson TIMEJuly 14, 2022 PRINT

Spending can balloon out of control quickly, and with inflation rising, keeping tabs on your money is more important than ever. As you examine your spending, look at the expenses you can’t control. More importantly, take a hard look at what expenses you can control.

Analyzing your expenses doesn’t have to be a mystery or a hardship. There’s a simple formula that makes controlling your expenses doable.

Payroll Deductions: Unavoidable

One area you can’t control is your payroll deductions.

Payroll deductions are so standard you probably aren’t even aware of how much is taken out. But imagine that your employer handed you a wad of money—your gross pay in cash. Once you have it in hand, your employer starts taking back your hard-earned cash for the required deductions. As a result, what’s left in your hand seems significantly less than what you were initially given.

For many people, the frustrating thing about payroll deductions is that they can’t control this expense.  However, although you can’t do much about taxes and Social Security deductions, there is a way to control some of your other expenses.

Identify Expenses You Can Control

Most people would be surprised to know how they’re truly spending their money. Part of the formula for controlling your expenses is identifying them. It’s easy to do this. Over a month’s time, write down all of your expenditures. These include your fixed and, most importantly, your variable expenses.

A fixed expenditure is the same each month, while a variable changes monthly. Most fixed expenses are identified as “needs,” such as housing, auto payments, etc. On the other hand, most variable expenses are identified as “wants” and are based on your more immediate desires.

Use the 50/30/20 Rule to Control Expenses

You’ve noted your expenses. Now it’s time to get down to work and take control of them. The 50/30/20 rule can help. This is a template that helps you control your expenditures—and save your paycheck.

You’ll start by dividing your expenses into three piles.

Each pile has a different meaning. This is the time to be honest with yourself about what belongs in each pile.

50 Percent: Needs

What do you absolutely need to survive? These needs are usually fixed expenses and include housing, basic groceries, transportation, healthcare, insurance, etc.

A mortgage payment is one of the best examples of a fixed expense or need. In 2019 the average mortgage payment in the United States was $1,487.  That comes to $17,844 a year.

But even “needs” can be controlled.

Fifty percent of your net income is all you should need to cover these expenses. If you find that your “needs” are larger than this 50 percent, then it’s time to take control and cut back.

Downsize your lifestyle. Choose a vehicle with a smaller payment or sell that large house and go smaller. But keep your needs under 50 percent.

30 Percent: Wants

Look at where your paycheck is going and ask yourself “what’s not essential?” For example, going out two or three times a week or having that latte each morning is not essential—these are “wants.” These are variable expenses because they can change.

An example of a “want” is your morning coffee. The average Grande Latte at Starbucks costs $4.45 (before tax and tip). If you grab one daily, you’re spending $22.25 a week or $1,157 a year. This is not a need. It’s an expense you can control.

Your wants can blow a budget and put you in debt. However, you can control these variable expenses.

If your wants are over the 30 percent line, they’re chipping away at your paycheck, so cut back. Instead of going out, cook at home. Avoid compulsive online shopping. Take control.

20 Percent: Savings and Debt

Yes, it is possible to save, even if you’re on a limited budget.  If you’re not already participating in your company’s 401(k) plan, sign up. If your employer offers a matching contribution and you don’t sign up, you could actually be losing money. If you don’t have the option of a 401(k), or you’re self-employed, be sure to establish an IRA or other savings plan.

Although saving does take away some of your paycheck, think of it as a loan to yourself. You’ll receive it back with interest down the road.

And finally, if you have high credit card debt, pay it down to fit within this 20 percent. This should be a priority. A credit card’s high interest rates can eat away at your income quickly.

Control Where Your Paycheck Goes

Analyze where you’re spending your hard-earned paycheck. Although tax deductions can’t be helped, you have control over what happens to your net salary. You don’t have to live a draconian lifestyle, but make sure you think before you buy.

Use the 50/30/20 formula to guide your personal finances. You’ll stay out of debt and hopefully be able to save for retirement.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Anne Johnson
Anne Johnson was a commercial property & casualty insurance agent for nine years. She was also licensed in health and life insurance. Anne went on to own an advertising agency where she worked with businesses. She has been writing about personal finance for ten years.
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