Once you determine where your money is
going, and what you have left over, start by
paying off your most expensive debt first.
to benchmark spending across three main
categories: fixed costs, financial goals, and
flexible spending. The rule works by allotting
50 percent of take-home pay to be spent
on fixed costs, 20 percent to be put toward
financial goals, and the remaining 30 percent
to be used as flexible spending.
Fixed costs include monthly spending required to live. Think
of the essentials: food, shelter, transportation. Your mortgage,
utility bills, and transportation costs are often similar monthto-month and easy to predict, making this category the easiest
to budget.
Financial goals will help you get to where you need to be for
your future. This includes saving for retirement, paying down
debts, and building your emergency fund.
Flexible spending varies from month to month, but can be
somewhat predictable. Groceries, gas, and entertainment all
find their way into this category. While some of these costs can
be impulsive (going to the grocery store on an empty stomach
and buying everything in sight), you can look at monthly
spending to gauge what you typically spend on these types of
purchases.
Once you determine where your money is going, and what
you have left over, start by paying off your most expensive debt
first. Look for the credit card with the highest interest rate and
start paying off the balance by making more than the minimum
payment, while continuing to make the minimum payments on all
other cards. Taking these steps to start eliminating debt will allow
you to start investing your money to allow it to grow for the future.
Ownership Investments: Typically the most volatile and
profitable. These types of investments span from stocks, to
owning or running a business, to buying investment real estate,
to purchasing precious objects such as jewelry or art with the
purpose of reselling to make a profit. While you can make the
most money out of these investments, there is often greater
risk. If you have a “risk is worth the reward” mentality, then
ownership investments may be a good option for your money.
Lending Investments: Similar to Monopoly, you get to be the
banker. These low-risk investments, in the form of savings
accounts, tend to return less than high-risk alternatives.
Questioning why your savings account is considered a lending
investment? Your bank uses the money in your savings in
the form of loans, and in return pays you interest. Also, the
Federal Deposit Insurance Corporation (FDIC) insures up
to $250,000 per depositor per FDIC-insured bank if the bank
goes out of business.
Cash Equivalents: Money market funds are easy to convert
back into cash and the risk and return are both minimal. Your
money is liquid in this type of account, making it easy to get
money out. These types of investments are considered safe
bank deposits, but often yield a higher return. Investing in
“cash equivalents” is best for older investors who are looking
for a safer option, rather than investing in risky, long-term
stock options.
Paying down debts and putting your money toward your future
is a rewarding experience. You’ve worked hard for your money, so
whether you are saving up for your first car or looking toward a
relaxing retirement, make sure your money is working just as hard
for you. n
INVESTING ESSENTIALS
We all work hard for our money, but it is
important for your money to work just as hard
for you. Now that you’ve determined that 20%
of your money should be budgeted to financial
goals, you just need to figure out how to invest.
No matter what you are saving for, you
should start by setting realistic, manageable
goals for your money, and then find the
discipline to reach them.
Investopedia breaks investments into three groups:
ownership, lending, and cash equivalents.
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