So far you have calculated 50% of your disposable monthly income (gross income after taxes) for Bare Necessities which pay for the basic expenses you need to live. Many of us are spending too much in this category and in future Blogs I will discuss how to adjust down. But for now to get an overview of the whole financial picture, I am going to explain a second element in the equation: SAVINGS.
Savings are the next part of the basic formula to intelligently deal with your money. The Savings allotment is 20% of your DMI. If your DMI is $2,200, then 20% of that amount is $440 for Savings each month. It’s that simple. But Savings doesn’t necessarily mean money that gets placed in bank accounts or investments for future use. Savings in this plan means money that first goes towards paying off your debt.
There is two kinds of debt. There is the debt that is from your Bare Necessities like the mortgage payments, car payments, student loans and alimony or child support. This type of debt is paid from the Bare Necessity funds.
The second kind of debt is unsecured debt like credit cards, personal loans and all other types of unsecured creditor bills in which the balance is being paid off over time. *(See list below for more examples). This type of debt is paid from the Savings funds. Most people are stuck with minimum payments for a long time due to taking on too much debt. It will take time to climb out of this hole, but it is the right direction. Having a balanced financial plan the Savings funds should be sufficient to pay for all minimum payments AND also to pay more each month on some of the accounts in order to wipe them out.
By paying off these accounts while at the same time firmly holding on to the policy of cash only spending, debt can be reduced and eventually eliminated. Then Savings can be dedicated to your future financial health and growth.
*Post content is primarily derived from the book All Your Worth by Elizabeth Warren & Amelia Tyagi which is highly recommended reading.
**Medical bills, mail order bills, telephone bills, credit card bills, money judgments loans from relatives, store charges, loan companies, criminal restitution debts, money owed to creditors who repossessed your property, cable T.V. bills, back rent, bills for goods or services, payday loans, bills owed to old landlords, loans on your pension /javascript”>
Iowa Bankruptcy Attorney Robert Liptak
Fairfield, Southeast Iowa