If you had read my last blog on budgeting and downloaded my sample spreadsheet, now is the perfect time to share my method of how to prioritize spending; the 10-10-80 budget. The budget is simple and it starts with giving; you give away the first 10% of your net income before tax. Wow! This may sound extreme, but keep reading, it gets better! The second step is saving; you save 10% of net income. And then finally living, you live on 80% or less of what is left over. Is this possible? Does it have benefits? This may sound difficult, and initially it was for me, but I assure you it is an excellent way to grow your finances while living beneath your means. The tracking tool you have selected, (Mint, Quicken, or my spreadsheet), will help with this. Personally I have been living on less than 80% of my income for some time now and I always make sure I give at least 10% away. Below are my reasons why each component is so important.
Giving away 10%
Studies show that people who give money away actually feel happier. People feel wealthy when they give and they also feel more in control of their money. Now 10% may sound like a lot, but why not start out at 5%? Later you can build up to 10% and soon you will see that it is not as hard as first imagined! Remember, it is more blessed to give that to receive!
In George Clason’s classic book “The Richest Man in Babylon” he outlines the “five laws of gold”. Law Number 1: save 10%. This may also take time to build up to, but saving a minimum of 10% of every dollar earned will help protect your retirement, ensure that your emergency dollars are available, and create priceless peace of mind!
Living on 80% or Less
In Stanley’s book “The Millionaire Next Door” he profiles “average” millionaires or what you might call “boring” millionaires, not the flashy celebrity rich that our culture seems so obsessed with. One of the keys to their wealth-creations is a lifestyle of living on much less that you earn. This is a completely counter-cultural mentality and requires not only discipline, but delayed gratification. Delay major purchases, shop before you buy, look for ways to get a bargain. The savvy shopper can save untold fortunes when it comes to mortgages, auto financing, and college loans. Big ticket items definitely need to be shopped, but even smaller purchases can have a big impact when it comes to groceries, entertainment, and dinning. Living on 80% or less than you earn will help you feel more relaxed and not stretched financially. Forget about the Jones’ and drive a used car, live in a less expensive house, or put off a pricey vacation if that what it takes to get spending under 80% of income. In the long run you will feel much better for it!
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