Do you use the golden ratio for financing?

SmartAsset: Morningstar says this spending strategy helps you reach your financial goals

SmartAsset: Morningstar says this spending strategy helps you reach your financial goals

There is no shortage of budget and spending rules when it comes to personal finance. Someone says that you should not spend more than 30% of your monthly income on housing. Another says to always save 10% of your income. Don’t take more than 4% of your retirement egg. Then there is the golden ratio budget. Here’s why Morningstar says you should consider this strategy.

a financial consultant They can help you create a financial plan for your needs and goals.

This budgeting approach breaks down your monthly spending by estimating how much gross income It goes towards your past, present and future.

According to Morningstar, your expenses can be broken down into this financial timeline:

  • Past: Pay for things you have bought/done in the past

  • the present: Finance your current lifestyle

  • the recipient: Accumulate to create future income

For example, a person who earns $60,000 per year has a total monthly income of $2,500. If she saves $250 for retirement and pays $250 a month on her credit cards, her golden ratio would be 10-80-10, with 10% going into the past (debt), 10% geared toward the future (retirement) and 80% on room and board. and other living expenses.

By analyzing your spending and calculating your golden ratio, you can give yourself a budget check without getting bogged down by how much you spend on groceries, how much gas, how much clothes, cell phones, cable TV and other expenses. This type of item budget can be confusing, intimidating, and simply boring. It can discourage people from taking a rational look at their spending and creating a plan that directs every dollar where they want it to go.

“A certain dollar amount is not helpful because everyone’s finances are different,” Morningstar explained. Instead, the Golden Ratio “skips all the scrutiny and elaboration and gets to the heart of what you need to know: Is managing your money sound? Are you saving enough?”

While there aren’t any hard limits to the budget scheme, Morningstar recommends saving 20% ​​while keeping debt payments at 30% or less of your total income. A 30-50-20 budget can be the ultimate goal over time. But you should also note that other experts recommend “36% base,” which stipulates that the debt-to-income ratio should not exceed 36%.

The golden ratio budget echo is widely known 50-30-20 budget You propose to spend 50% of your income on needs, 30% on desires, and 20% on savings and debts. The “Needs” category covers housing, food, utilities, insurance, transportation, and other necessary living costs.

Another approach, favored by behavioral economists, recommends skipping the budget altogether because most people simply won’t stick to any kind of formal spending plan. Instead, they suggest automating your savings toward specific goals and amounts and then feeling free to spend the rest.

“If your debt is healthy and you hit your savings goal, you can spend the rest without feeling guilty! It doesn’t matter if you spend it on restaurants, vacations, clothes, or model trains,” Morningstar said in an article, which set a 10-60-30 ratio as a personal goal. “If your past and future are in order, you can skip all the details and agonize and enjoy your life and your money.”

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SmartAsset: Morningstar says this spending strategy helps you reach your financial goals

SmartAsset: Morningstar says this spending strategy helps you reach your financial goals

The golden ratio budget divides your monthly spending by assessing how much of your total income goes into your past, present, and future. This approach can help put your finances on a schedule and adjust your goals based on short, medium and long-term needs.

Financial planning tips

  • a financial consultant It can help you compare different budgeting strategies for your financial plan. Free SmartAsset tool It matches you with up to three vetted financial advisors serving your area, and you can interview your own advisors at no cost to determine which one is right for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.

  • The key to budgeting is a good understanding of your financial schedule. If you need help setting goals, this guide is for you It breaks down retirement goals by age.

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