Payroll Deductions: UnavoidableOne 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.
Identify Expenses You Can ControlMost 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.
Use the 50/30/20 Rule to Control ExpensesYou’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.
50 Percent: NeedsWhat do you absolutely need to survive? These needs are usually fixed expenses and include housing, basic groceries, transportation, healthcare, insurance, etc.
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.
30 Percent: WantsLook 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.
20 Percent: Savings and DebtYes, 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.
Control Where Your Paycheck GoesAnalyze 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.