Page 12 - Equity Movement Magazine-Issue2

BUDGET RESOURCE (CONT’D)
the cost of your laptop or airfare to conferences, as well
as the amount you set aside for taxes. You’re
responsible for remitting your own quarterly estimated
tax payments to the government because you don’t
have an employer to take care of it for you.
Just remember that being self-employed means that you
must also pay the self-employment tax, so include this in
your calculations. The self-employment tax is double
what you would pay in Medicare and Social Security
taxes if you were employed.
Step Two: Limit Your Needs to 50 Percent of Your After-
Tax Income.
Now go back to your budget. How much do you spend
on “needs” each month, things like groceries, housing,
utilities, health insurance, car payment, and car
insurance? According to Warren and Tyagi and their
50/30/20 rule, the amount that you spend on these
things should total no more than 50 percent of your
after-tax pay.
Of course, now you must differentiate between which
expenses are “needs” and which are “wants.” Basically,
any payment that you can forgo with only minor
inconveniences such as your cable bill or back-to-school
clothing is a want. Any payment that would severely
impact your quality of life, such as electricity and
prescription medicines, is a need.
If you can’t forgo a payment such as a minimum
payment on a credit card, it can be considered a
“need,”according to the Warren and Tyagi. Why?
Because your credit score will be negatively impacted if
you don’t pay the minimum. By the same token, if the
minimum payment required is $25 and you regularly pay
$100 a month to keep a manageable balance, that
additional $75 isn’t a need.
Step Three: Limit Your "Wants" to 30 Percent.
This sounds great on the surface. Can you put 30
percent of your money toward your wants? Hello,
beautiful shoes, trip to Bali, salon haircuts, and Italian
restaurants.
Not so fast. Remember how strict we were with the
definition of a "need"? Your "wants" don't include
extravagances. They include the basic niceties of life that
you enjoy, like that unlimited text messaging plan, your
home's cable bill, and cosmetic (not mechanical) repairs
to your car.
You might spend more on "wants" than you think. A
threadbare minimum of warm clothing is a need.
Anything beyond that, such as shopping for clothes at
the mall rather than at a discount outlet, qualifies as a
want.
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Step Four: Spend 20 Percent on Savings and Debt
Repayments.
Now about the extra $75 you pay on that credit card
each month. That's neither a want nor a need. It's the
"20" in the 50/30/20 rule. It's in a class all its own.
You should spend at least 20 percent of your after-tax
income repaying debts and saving money in
your emergency fund and your retirement accounts. If
you carry a credit card balance, the minimum payment is
a "need" and it counts toward the 50 percent. Anything
extra is an additional debt repayment, which goes
toward this 20 percent category. If you carry a mortgage
or a car loan, the minimum payment is a "need" and
any extra payments count toward "savings and debt
repayment.”
An Example of the 50/30/20 Plan:
Let's say your total take-home pay each month is
$3,500. Using the 50-30-20 rule, you can spend no
more than $1,750 on your needs per month. You
probably can't afford a $1,500-a-month rent or
mortgage payment, at least not unless your utilities, car
payment, minimum credit card payments, insurance
premiums, and other necessities of life don't exceed
$250 a month.
If you already own your home or you're locked into a
lease, you're pretty much stuck with that $1,500
payment. Consider relocating when your lease expires to
make your budget more manageable or take a look at
your other "needs" to see if there's a way that you can
reduce any of them. Maybe shop for more affordable
insurance or transfer the balance on that credit card to
one with a lower interest rate so your minimum payment
drops a bit.
Your goal is to be able to fit all these expenses into 50
percent of your take-home after-tax income.
You can spend $1,050 a month on your "wants" based
on that $3,500 you're bringing home each month. You
might consider doing without a few things and shifting
some of this money to your "needs" column if you're
coming up short there—not necessarily indefinitely but
until you can get your needs down to a more
manageable level. Remember, you still need 20
percent left over so you can save and pay down your
debts according to the 50/30/20 plan.
Now you have $700 left, that last 20 percent. You know
what to do with it. Pay down on debt, save for an
emergency, and plan for your future.