Fall Fix-Up: Finance

Ugh, money. it seems like there's never really enough of it. I know I hardly ever go a day without thinking about money in some way, and I know a lot of my friends have the same issues and difficulties.

I'm taking an online personal finance course this semester as one of my gen eds. Primarily we are learning about budgeting, real estate investment, buying and selling a home, and applying for mortgages. I just had my midterm yesterday and found to my surprise at 11am that I had to write 3 3-page essays by 11:59 that night. This wouldn't have been that big of an issue if I hadn't already agreed to work with one of my work-friends on a film project all day as well as do various other important assignments for today. I ended up spending the hours between 7pm and 11pm just sitting in my apartment and writing nonstop. It was not the most pleasant day off from work and school. On the bright side, however, I now feel quite well versed in the issue of personal finance management.

I'm just a kid in college so I won't act like I know what to with finance in the larger scheme of things. But there is one thing I have learned which my professor claims to be the most important rule in finance, and I will discuss that today for my fall fix-up.

The rule is that you should always keep your spending on must-haves to 50% or less.

Must-haves are all the necessary costs of living such as electricity/gas/water bills, rent, clothes, and food. In the 1970s, the typical family had one spouse working and spent on average about 54% of family income on must-haves. This left a wide margin of 46% for savings for the future and wants. Wants include things like family vacations, dinners out, the occasional morning cappuccino, etc. In 2005, the typical family had both spouses working, and yet 75% of total family income was being spent on must-haves. This left only 25% for wants and savings for things like retirement and college. This means two things: our economy has changed drastically since the 1970s, and the average American family is trying to live in a way they can't truly afford.

The main sources of must-have spending are homes and automobiles. Many people have taken out loans larger than they can realistically pay back (thanks to deregulation of banks/mortgages) in order to pay for things like new cars and large homes. They can't really afford these things, so they are constantly pinching pennies and tightening their belts just to pay the monthly bills. Whereas, if they had simply bought a home they could afford even if it is slightly smaller and perhaps a used car instead of a new one they would be much more financially free. The extra financial freedom means a better ability to save for the future- savings which can ultimately be used to buy the bigger home or nicer car when the timing is actually right.

I think it's important to create a budget and evaluate how much you are spending on must-haves and wants each month. My course teaches that ideally, you should spend 50% on must haves, 20% should go into savings, and the remaining 30% can go towards wants and any unforeseen expenditures. 

Personally, I'm fine with living in a smaller apartment and driving a used car if it means more freedom to do things like take weekend road trips and go out to dinner with my friends. I had never heard of this way of budgeting money before, and I found it very interesting.

If you're interested in learning more about this idea, check out the book All Your Worth by Elizabeth Warren and Amelia Warren Tyagi. It goes into much more detail :)

Another fall-fix up coming at you later this week!