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"Quite often, it seems like we're not getting
anywhere when, in fact, we are." |
It is a given that life is not fair. Many aspects of life are, in fact, often unfair. And then, consuming the world from only our own perspective, so many more injustices can be misidentified when they are simply the consequences of life being too fair against us, e.g. punishing us for our own mistakes, failures, or bad judgments.
I believe most of life's frustrations stem from misunderstanding, specifically that we do not fully understand the reasons contributing to present circumstances. The better we understand things, the more we accept its quirks (for better or worse). For many, the frustrations of dealing with the mysteries of finance is the quintessential injustice of this world. Although I would not classifying income disparity as a myth, the discussions surrounding it seem to be more frequent among
the have-tos than the haves, as if it is the reason for their financial despair rather than any of their own choices.
I recently paid off my mortgage. The amount of future interest payments that I saved by paying it off earlier only amounted to about one additional payment because my mortgage was near the end of its term, and more of the payments are assessed to interest at the beginning of a loan than at the end. While some may cry foul, citing corporate greed or other standard excuses, there is a good reason for that perceived injustice. Interest income in a debt represents its risk. The risk of nonpayment is highest at the beginning of a loan and lowest at the end of its term. If debtors have paid a loan consistently for several years, the likelihood that they will default in later years is considerably lower.
Many time-tested, proven "rules" of personal finance are universal without any bias towards the rich over the poor. Budgeting is not needed by everyone, but it certainly is for others. Its necessity depends not based on assets alone, but mostly on money management skills. If you live like you're rich when you're not, then you are unlikely to ever be. Likewise, if you live like you're poor when you're not, then you are unlikely to ever be.
The most common guideline of budgeting is
the "50/30/20 rule." Granted, this rule may not be as universally well-known as it should be. I read an article in another person's financial blog this year, and a reader effectively embarrassed himself in the comments section by saying that the article did not provide enough information, simply because the author assumed all her readers knew the 50/30/20 rule. In short, the rule stipulates that up to 50% of your income should be spent on your needs or other obligations, 30% can be spent on your wants, and at least 20% should be saved. Often, the phrase is printed as "the 50/20/30 rule" to reinforce the priority of each (hence the "pay yourself first" rule). The reader also sounded as though he needed more rules on how to manage money. There are reasons why the guidelines and rules of thumb are not exact. First, everybody's situation is different (which, ironically, was also one of the reader's complaints). Everybody gets 100% of their take-home pay, so it does not matter whether that amount is $10,000 or $1,000,000 annually, the 50/30/20 rule can be applied. Second, rules are restricting.
The goal of money management is to enjoy more freedom, so being forced into a set of rules (unless you set them yourself) counteracts the end goal.
Our last paystubs of the year are the most useful tool to calculate these 50/30/20 amounts because they will show amounts for the entire year. To calculate the starting amounts for the purpose of budgeting, simply take the net income amount and add any pre- or post-tax deductions. Taxes and employer-paid benefits should not be included in the calculation. The deductions can be categorized in one of the three columns, typically as needs (e.g. medical plan) or as savings (e.g. 401k). Tithing can be subtracted from the starting amount or included in the 50% category as an obligation.
After the target amount of each category is calculated, it is a good time to gauge how close your spending has been to this ideal budget. The beginning of the year is a great time to make these determinations because year-end amounts are so readily available. Also, it may be psychologically easier to use an entire year to assess average spending habits because it levels out any excuses that can be used to over-explain deviations from the categories. While last year's spending will not be the same in the new year, this new year will have its own emergencies and other surprises to be (un)expected.
