Budget Your Way to Freedom

In my last post, 6 Ways to Beat the High Cost of Living, the first item I reference is a budget.  The budget should be your first step towards financial freedom.  You can only manage, what you measure. 

In this budget example, we will setup a budget based on the median necessary 2021 living wage across the entire US of $67,690. (Source:  Business Insider).  We will deduct pretax items like medical insurance at 2% of gross pay and an HSA contribution at 2% of gross pay.  Let’s say our average monthly take home pay is $4,230. 

We will base our budget on a system of percentages.  These percentages should be modified per tax bracket and responsibilities. 

At first it may seem restrictive.  Focus on the basics like food, shelter, clothing, transportation and work backwards toward your least important priority.

Budgeting will allow you to control where your money goes.  Please find a simple monthly budget example below and some key metrics I have used in the past at this income level to get ahead.  We will have to make a few assumptions as we move through this exercise.  This budget is for a single person living alone in TN.

Monthly Budget based Upon After Tax Income (ATI) of $4,230.

Living Expense Items	Percentage of ATI	Amount
Mortgage/Rent	25%	$1,058
Food & Dining	15%	$635
Clothing	4%	$169
Auto & Transport	10%	$423
Emergency Fund Transfer	8%	$338
Contingency (Margin)	5%	$212
Sub-Total	67%	$2,835
Remaining for Debt/Invest	33%	$1,395
Total	100%	$4,230

This is good news.  We have money left over to pay down debt and invest.  Now we can start to build some wealth.  We have 33% or $1,395 of income cash flow remaining in our budget.

I recommend paying down your lowest principle debt balance with the highest interest rate first.  Focus on this account until it is paid off.  This will also help with motivation.  Use the interest rate with a multiple of (10) as your debt pay down allocation.

Let’s say you have these two debt types below:

• 16% Interest Rate Credit Card with a balance of $5,000
• 3% Interest Rate Student Loan with a balance of $20,000

Always make sure you are paying all debt minimum payments.  In this case you would use 100% of your remaining cash flow to pay off the credit card.  Once the credit card is paid off, you will start to pay 30% of cash flow toward debt and invest the other 70%. Here’s a debt and investment example below.

Debt and Investment Items	Percentage	Amount
Student Loan	(3% Interest Rate) x 10 = 30%	$1,395 x 30% = $419
Investment (Roth 401k)	70%	$1,395 x 70% = $976
Total	100%	$1,395

Good things will start to happen if you can implement this debt and investment ratio.  You will be paying down debt while investing in your future.

In an effort to make this easier, I recommend finding a budget software program that is connected to all of your accounts.  I personally use Mint.

This budget is lean, but will responsibly focus you on net worth grow.  If you are unhappy with your monthly expenses and responsibilities you have two choices.  Decrease your spending and/or increase your income.

What would be the first item in your budget to get cut or reduced?

Disclosure of Material Connection:  I have not received any compensation for writing this post.  I have no material connection to the brands, products, or services that I have mentioned.  I am disclosing this in accordance with the Federal Trade Commission’s 16 CFR, Part 255:  “Guide Concerning the Use of Endorsements and Testimonials in Advertising.”