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Cents and Sensibility

Divide and Conquer: Where Your Money Should Go

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Where is your money going? It’s time to find out. The best way to figure it out is to write down the percentage of what you are currently spending under these categories (giving, savings, living, and paying off debt).

Then, compare your current spending to what research has shown to be realistic to what your percentage should be. The outcome may surprise you. Below is the 10, 20, 30, 40 rule that can guide your spending for the future.  Here is where your money should go:

Credit: Thinkstock

Credit: Thinkstock

10 percent of your income should be used to give. Many people tithe to their local church or give donations to their charities. American Red Cross, Crisis Recovery, and the Humane Society are popular charities that could use your help.

Credit: Thinkstock

Credit: Thinkstock

20 percent of your income should be used to save. You can set up a savings account and have 20% go directly to it from your paycheck. Most companies allow you to split your check to go to more than one accounts. Savings should be used towards your six month emergency plan; consisting of six months’ worth of savings based on your bills that you would pay for six months. Therefore, if for some reason your household is unable to bring in income due to unemployment, disability, or unexpected circumstances, you will still be able to pay your bills for six months or until you secure another job.

Credit: Thinkstock

Credit: Thinkstock

30 percent of your income should be spent on what I call “living your life.” This “pot” is where you buy Christmas gifts, pay for the lunch date, or purchase your friend’s birthday gift. But, most importantly, pay yourself. Why pay everyone and not give yourself anything? It can become stressful to work, pay others and not have anything left for yourself. You will feel better knowing that it’s not all work and no play.

Credit: Thinkstock

Credit: Thinkstock

40 percent of your income should be spent on paying bills/eliminating debt.  This includes all monthly bills. Once all monthly bills are paid, use the remaining 40% to eliminate your debt (credit cards, car notes, etc.). Use the “snowball” strategy for debt reduction. “Snowball” strategy is focusing on the highest interest rate bill first; pay as much of that bill as you can, while paying the minimum amount on the other debt. Once the highest interest rate bill is completely paid, focus on the next bill with the highest interest rate. Repeat this strategy until all debt is paid.

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About Dr. Karen Ratliff

Dr. Ratliff is a certified life coach and professional educator, assisting many people in accomplishing financial, career, and educational goals.  She is also the author of “Tightening Your Bootstraps: 104 Tips to Kick Your Debt to the Curb Now.” Keep up with her budgetary advice via Twitter @drkarenratliff and her website at www.drkarenratliff.com