budget

How Much Car Can You Afford?

It happens every year. I see the pristine Christmas scene and the doting husband who takes his unsuspecting wife outside with her hands over her eyes and surprises her with a new car. You know the one with the big red bow on top. And I daydream about replacing my wife’s 2007 Corolla and she thinks that I am the most wonderful husband ever. Until this year…

I saw this commercial where this good-looking guy brings his equally attractive wife down in front of their mini-mansion. He has bought her a red upscale suburban-type vehicle and bought a black truck for himself (Have you seen it?). And then she runs over by the truck and says, “I love it”. As she steals his truck, the reality of the situation hits me. How can she be so selfish? Obviously, the truck is for him! And by the way- what does this guy do anyway. Who can afford $120,000 worth of car for Christmas? I wonder what they were driving before- that both vehicles need to be replaced at the same time. But I digress in my envy.

Most of us are not in an income bracket where we can afford two new vehicles, but if you look at how much families are spending on vehicles these days, you would assume that many of us think we are living in the lap of luxury. That is until the bill comes due. Every day I see families who have sabotaged their finances by buying too much car.

In a previous article, we talked about how much of your budget to spend on housing and today we are talking about your transportation category. Our recommendation is 14% of your net spendable income (Gross minus Taxes minus Giving minus Childcare/child support cost). This 14% needs to cover

Auto Payment
Insurance
Gasoline
Auto Maintenance
Tags and Property Tax

I see way too many financial clients who have allowed their transportation budget to get way out of line. Two high car payments and all the trimmings put them in a category of stealing from the rest of the budget and they become what we call “car poor”. Meaning they can barely afford the gas to use the vehicle on a trip or worse they have to make drastic cuts in other critical areas of their lives to survive.

Our recommendation: Next time you are thinking about making a car purchase make sure and run the numbers before you make the purchase. Starry-eyed spouses come with driving cars that your family can actually afford.

—

About The Budget Guys:
For the last 10 years, The Budget Guys have been helping families and individuals get their financial lives together. Tim has been married to Terri for over 30 years and Chris has been married to Tiffany for over 20. We have both had our share of knock-down-drag-discussion over finances. So, we bring some experience. We would love to sit down with you at your kitchen table (metaphorically speaking, we actually meet in our offices), and lend a fresh set of eyes to your situation. For more info and budget help, check out TheBudgetGuys.org.

Maybe A Budget Isn’t Right For You

Budgeting. It’s something every parent loves to talk about, but are those people that are always telling you to keep a budget actually budgeting? According to CNBC’s Kathleen Elkins, budgets are a waste of time and don’t lead to a long, happy life.

Her advice?

Don’t bother budgeting.
Keep track of your spending.
Set-up automatic savings.
Spend without guilt.

Is The 50/20/30 Budget Right For You?

If you’re in the market for a new budget, you’ve probably heard of the 50/20/30 method, right? The plan is pretty simple: take your income after taxes and divide it– 50-percent on needs; 30-percent on wants; and 20-percent on savings.

How do you differentiate between wants and needs? Well, that is pretty simple. Needs are the things you must pay for and things necessary for survival like rent/mortgage, car payment, groceries, insurance, and utilities. Unfortunately, Starbucks, Netflix and gym memberships aren’t needs. Wants are the things that you spend money on but don’t have to– like a Bentley when a Honda will do just fine.

5 Common Lifestyle Choices That Are Total Wastes Of Money

These days, personal finance goals and paying down-debt are commonplace conversations but are the plans that work for your friends right for you too? Tasha, with the Financial Diet has broken down five lifestyle choices that are wasting your money.

5 Common Lifestyle Choices That Are Total Wastes Of Money:

1. Not having a 1-year budget plan.
Budgeting for an entire year gives you a holistic view of your financial situation.

2. Paying off low-interest debt before you’ve hit your minimum savings rate.
Understand how much your debt is costing you– you could actually save more money while paying down your debt if you do it correctly.

3. Living in a high cost of living area.
Your job opportunities don’t have to determine the area you live in.

4. Not cooking more meals at home.
Guess what? Eating out is super expensive.

5. Too many status symbol purchases.
Don’t sacrifice your financial goals for high-end purchases over and over again.

How Much House Is Too Much House?

I wasn’t sure if he was going to have a nervous breakdown right there at my desk or not. He kept saying over and over, “but, they said that I could afford it.” His wife looked at me with pleading eyes to comfort him as she went in the other room to tend to their children. Finally, I mustered the courage to tell him what the numbers said. As gently as I could, I told him, “buddy, I don’t care what they told you. Your housing expenses are 42-percent of your income and the reason you are in my office today is YOU HAVE TOO MUCH HOUSE.” He left shortly thereafter and I never saw him again. He had gained the missing piece of the puzzle.

Unfortunately, as budget coaches, we see this more than we care to. There are a lot of formulas out there to figure out what you can afford. Most of them focus primarily on the mortgage itself or many banks look at your overall indebtedness. Our approach is to look at all the house expenses as one overall housing cost and then look at that number as a percentage of your net spendable income.

We recommend that your housing cost is at max– 30-percent of your spendable income.

That includes rent or mortgage, utilities (including phone), insurance, taxes, and maintenance as well as any miscellaneous housing expenses like housekeepers or lawn care.

Net spendable income is just what it sounds like. Your take-home pay minus any non-negotiable items you may have items like daycare, child support or giving. Sidenote- many families do subtract generosity contributions before figuring out how much they have to spend on the rest of their lives.

For a simple example, let’s say you make $50,000 a year. That means you gross $4,166 a month. After taxes (25-percent for illustration) you bring home $3,125 a month. So your 30-percent housing allowance would be $937.50 per month. THE KEY HERE IS THAT THE $937.50 IS FOR ALL HOUSING EXPENSES. That puts you in a decent apartment in some markets.

We will continue to roll out the recommended percentage in the future but the biggest category is housing and if you can hit the 30-percent max it really helps the rest of your budget. Don’t let the lenders entice you into buying too much house. We will look at some of the other categories later but here a few key ones that add up to 72-percent of your spending plan.

Housing: 30-percent
Groceries/Eating Out:15-percent
Auto:14-percent
Insurances: 13-percent

Run your housing numbers before signing the lease or taking on the mortgage. Don’t forget to include the other housing cost. That way you won’t be in my office wondering why you got too much house!

—

Do You Have a Wonderful-Life Financial Plan?

We all grow up dreaming of a wonderful life (yes, the movie). Family and friends who love us. Good job. Nice house. Plenty of food. Enough money to take care of our needs and even some of our wants. When I got married one of my friends was asked to give us some marriage advice. His advice was classic. “Tim, give Terri everything she wants.” He added, “and Terri, only want what you need.” I can still remember his wife catcalling from the background about his bad advice. But, behind his playful banter was a principle. And the principle is this; for a family to be successful the family has to be on the same page and have a plan. Particularly in the area of money. Nothing will challenge a marriage more than how to manage the family resources.

What does a plan look like you say? We use the word budget, financial plan and spending plans interchangeably. But a good financial plan brings a family onto the same page. You would never run a company or a sports team or a civic organization without a plan and yet we run our family finances without a plan all the time and our families are suffering as a result. A recent Gallup poll said that 1 in 3 have a working budget. That means that two-thirds of us are just winging it. Here are some other characteristics of a good financial plan:

A Good Plan identifies where the family is going to spend the money they make. In later articles, we will give you some percentages to guide you into developing a holistic spending plan.
A Good Plan identifies what a family is going to give away. Generosity is a very important way to combat the consumptive lifestyles that many of us live. It truly is better to give than to receive.
A Good Plan identifies what the family is going to save (short term, mid term and long term). The wise man will have resources to draw from when times get tight and attend to the needs of his family tomorrow as well as today.
A Good Plan freezes and eliminates debt from the budget. The borrower is the lender’s slave and debt must be managed in order to get ahead.
A Good Plan makes sure that the family has the right protections in place (insurance, will, etc). The people and things you manage need to be protected. Insurance and estate planning can make sure that your assets are protected in the event that you experience hardship.

We are going to be speaking to each of these topics in subsequent posts. Check back in with us. The wonderful life you are hoping for financially may be a little closer than you think. But you need a plan!

—

About The Budget Guys:
For the last 10 years, The Budget Guys have been helping families and individuals get their financial lives together. Tim has been married to Terri for over 30 years and Chris has been married to Tiffany for over 20. We have both had our share of knock-down-drag-discussion over finances. So, we bring some experience. We would love to sit down with you at your kitchen table (metaphorically speaking, we actually meet in our offices), and lend a fresh set of eyes to your situation. For more info and budget help, check out TheBudgetGuys.org.

USDA’s Food Cost Chart is a Great Way to Help You Budget

If you’re like a lot of people, it’s hard to know how much money you should be spending a month based on your income and stage of life. If you’re like even more people you do that thing where you go to the grocery store and buy food for home, but then you eat out a lot and the food goes to waste. Lucky for you, the United States Department of Agriculture has a great chart for figuring out how much you should spend based on four different cost levels.

The USDA says, “The Food Plans represent a nutritious diet at four different cost levels. The nutritional bases of the Food Plans are the 1997-2005 Dietary Reference Intakes, 2005 Dietary Guidelines for Americans, and 2005 MyPyramid food intake recommendations. In addition to cost, differences among plans are in specific foods and quantities of foods. Another basis of the Food Plans is that all meals and snacks are prepared at home. For specific foods and quantities of foods in the Food Plans, see Thrifty Food Plan, 2006 (2007) and The Low-Cost, Moderate-Cost, and Liberal Food Plans, 2007 (2007). All four Food Plans are based on 2001-02 data and updated to current dollars by using the Consumer Price Index for specific food items.”

For example, if you or your family are looking at the moderate plan, you will be spending between 10 and 15-percent of your monthly budget on food. Families with growing kids on the moderate plan fluctuate between 14 and 17-percent of their monthly budget on food.

Check out the chart and see how you’re spending and if you could do better!