NerdWallet's Smart Money Podcast - How do I prioritize my budget?

Episode Date: July 10, 2017

Wants versus needs. Spending versus saving. You can have it all (even the fun stuff) by following a simple budget to direct your dollars wisely.

Hello, and welcome to NerdWallet's Smart Money Podcast, where we answer your real-world money questions in 15 minutes or less. I'm your host, Sean Piles, and joining me is my co-host, Dayana Yochum. So the premise of the show is simple. You send us your personal finance questions, and we tap NerdWallet's in-house experts to answer them. And at the end of the show, we'll leave you with the takeaway tips and you can put all your newly acquired knowledge into action. Exactly. So today's question comes from Diamond in Seattle and she says, I make a decent salary and I have my own

expenses covered each month, but I'm wondering how do I prioritize what I do with my money? Great question. And it sounds like a deceptively simple one that should have a really easy answer. And unfortunately, that's not the case. The whole topic of prioritization is really easy to ignore or to just get wrong. A lot of us sort of go through the day, the month, the year, and we spend money where we think we need to spend money. But often that spending doesn't really align with our own personal priorities. Yeah. If you don't have that focus, it's hard to know what

you're doing. I found myself in that same situation when I landed my first job out of college. I had money for once, but I didn't know how to organize it or even really where it was going. What helped me was just turning on excessive notification from my banking app and it threw every stupid purchase I made back in my face. So you went with the nuclear option then? Yeah. I'm not going to lie. It was a little bit painful and that option does require a little bit of masochism to get into it, but it worked out for me and helped me see what I was doing with all of

my money or lack of. Right. Well, there are other options. And fortunately for everyone listening, we have professionals who can give you some solutions to tackle this problem on your own. In today's episode, we're going to show you ways to smoothly direct the dollars coming in and going out each month, kind of like financial air traffic controlling. And our navigation tips come to us from our nerd wallet, saving spending maven, Courtney Jesperson. All right, let's call her up.

Hey, Courtney. So help us out here. What should our listeners know about how to prioritize their money? Hi, Sean. So that is a really great question. And I think kind of the interesting thing here when you talk about prioritizing your money is that we all already prioritize our money. So when you think about prioritizing, you're basically making decisions, what's more important to you, and then you're spending money on what you're deciding is

the most important. So where you decide to live, what you decide to buy, what kind of car you decide to drive, you're already kind of making these decisions in the moment. But I think what the people kind of run into a problem is they want to be able to pay for things in the moment and then also plan for the future. So it really comes down to kind of reprioritizing and deciding what you want now, what you need to do so you're ready for your future and retirement and things like that. And the good news is there's a way to do both. So you can live in the moment and also live for the future. So that's what we'll be talking about today. I love that. It's sort of like your wallet is a window into your soul.

And if I'm looking at my credit card statement, my hair care is very important to me. And I've invested enough in that to serve my future retirement hair as well. That didn't make sense. But anyhow, you get what I mean. But this really is, so with the prioritizing, you know, when we talk about budgets and things like that, we always differentiate between needs versus wants. So walk us through that, if you would. Sure. So it sounds kind of simple, but it does bear kind of explaining.

So when you think about something you need, we mean financially something you absolutely have to have to live. So you need housing. You need food, you need insurance to protect you against financial loss. You probably need transportation if you need to get to your job. And hair care. You need hair care. So for me, that would be I need shoes. So and then on the want side, this is things that you'd like to have and you can buy, you can pay for it, but you don't have to have. So you could live without these. So wants are things like travel, entertainment, designer shoes, designer clothing.

And there is this balance between the two. That's where it gets kind of tricky. So you might need a car to drive you to work, for instance. But the kind of car you need is more where you cross over into the want category. So you might really like to have like a luxury SUV, but really what you need to get to work is just a reliable, affordable car. That's where you kind of cross over. And the thing is, you don't have to have just the mundane kind of car. You can have a nicer car, but you have to balance here. So the important thing here is to separate out your

expenses into the things you need, the things you want. You want to put those in order of importance. And the good news is you can have both. So you can have things you need as well as things you want, but you need to take care of the things you need first. So then you can leave room for the things that you want. Right. And even in that once category, you need to prioritize because for me, the type of car I drive is not important at all. It just needs to be reliable. But one of my higher priorities in the once category might be, you know, entertainment, eating out with my friends or going to live music events, things like that. So that's also to make sure that you're aligning your money with what you enjoy. Exactly. And I think the key here is that you should be able to have fun with your money, but it's not realistic that you'll be able to do everything. So even within these categories, like you said, you have to prioritize what's most important to you and then pick and spend your money on that one. Yep. And one thing that's been a little bit tricky to break down is even how to categorize how

much money you put towards these needs and then prioritizing your wants and making sure that you're still safe in case something happens. So how do you kind of see a good breakdown of how much you should put towards each of these sections? So yeah, very good question. So it is kind of a balancing act, trying to figure out how you can afford everything and fit it all into your budget. So a really good rule of thumb that we recommend at NerdWall

is called the 50-30-20 budget. So basically, this helps you allocate all of your expenses into these three different buckets. So the first one is the 50%. We recommend when it comes to needs, so things like your housing and your insurance, some of these recurring monthly payments, you should spend no more than 50% of your take-home income in this category. So you can definitely spend less and live below your means if that's

possible, but ideally you should shoot to spend no more than 50% in that area. Now, the next area is the 30% and that's the fun area. So we'll get to that later. That is what you can spend on your wants. And then finally, you have the 20%. So this is what you should be using to put towards your savings, your debt repayment. So we definitely recommend having an emergency fund. You can start with 500 and kind of build from there. But in case something happens, the unexpected, something you don't want to happen, like your car breaks down or you get laid off from your job, you want to have this little bit of an emergency fund built up so you can get by and you can have a couple months worth

of expenses saved up to help you out. So that is a good area. Put your 20% towards that. You also want to put it towards your retirement savings and paying off your debt. So things like your credit card debt or your student loan debt. Okay. I want to talk about that 30 in the 50, 30, 20, because we're in danger here of becoming the no fun buzzkill podcast. So help us out. 30% of your take home pay is for what? That is for your wants. This is the fun part. Yes. We don't want to be no fun. So if you budget appropriately and you have all of those categories kind of lined up, you should have 30% of your monthly take home income remaining to spend on the things that you want. So this is where you can do fun stuff. If you want to spend it on your hair care,

things like that. So you can also use this portion of your income to set financial goals. So if you want to do something fun, like take a vacation, maybe next summer you want to take a trip, you can start saving each month. So we would recommend taking a portion of that 30%, putting it into a savings account, saving it each month, setting it aside, and then it's easy for you to save up. And by the time you reach your goal, you'll be able to afford it. Right. Because some wants can't be covered by just your monthly budget. Exactly. Some wants you have to save up for down payments on homes, cars, vacations, extreme hair care product. Totally. So I try to stick to this 50-30-20, and it's a great goal. But living in San Francisco, working through student debt, it's not always the case that I make that. I wish that

I could put 20% away, but I'm wondering what sort of wiggle room you see in each area in the event that my 50% ends up being closer to 60? That is a great question. And I think these are obviously benchmarks and kind of idealistic guidelines, and it's not always realistic to reach these. And the key here is that the formula can never add up to more than 100%. So you can't spend 30% of your income on wants

and just be like, I should spend 30% on wants, but you're really spending 60% on your needs. So there has to be some give and take. So one thing you can do is kind of sit down and reanalyze your expenses. So there might be areas that you're paying on needs or on wants, and you could be paying more than you need to be paying. So it might be time to make a major move like downsizing your living accommodations, or it might be something simple like calling up your utility company and asking them to give you a lower rate. So you can make changes there. And then you can have to maybe in the short term sacrifice on your wants, because that obviously is not a necessity.

But making your recurring payments each month, that's more of a necessity. So some things might have to give in order to get to that balance. Sorry, Sean. Man, but I wanted to go see Wonder Woman. Okay, you could totally afford that. I'll take you to see that. So, all right, Courtney, tips for the week willed. I'm not naming names, Sean. Sean, here's a tip for you. Never make a rash financial decision. So I am guilty. If you like

movies and Dayana likes her hair, I like shopping and I like clothes. So you should never make a purchase in the moment though. So I like to wait a day or two before you buy anything because just psychologically you have some time and distance from the purchase. You kind of rethink it. You can come back to it. And if days go by and you look at it again, you can decide, do you still really want it? Do you really need it? Or maybe you were just kind of didn't know what you were thinking and you don't really

want it or need it anymore. So one thing I, when I, when I'm like clicking around online, I'll bookmark something or maybe put it in my cart and then go on with my day. Most of the time, either I forgot, I forget about it completely, or I go back and look at it and think, what was I thinking? Orange is so not my color, delete, get it out of my cart cart that's such a great tip too because the good news is if you went back to that orange shirt or whatever you were shopping for and you decide that you do still want it you might even get a better price on it so I don't know if you guys have gotten this before but if you have a login at a retailer so you're logged in with your

email address and you add something to your cart and then you kind of click away and close the tab. You might get an email later saying like, wait, did you forget about this? And sometimes they'll give you a coupon to finish off your transaction. So you might save money that way, too. Yeah, nice. I'm still buying something and it's still orange and it's still not my color. I'm just clicked on the bright side. OK. I'm just looking on the bright side. Okay. So another thing, when I feel like I've had a lot of spending leakage, I switch to an all-cash diet.

Studies show that we spend a lot less when we use cash because it's really tangible in a way that whipping out the credit card isn't. So with cash, if I've got $40 in my wallet, I feel an immediate loss of spending capital when I fork over 20 bucks of that. So when I want to make sure I'm not buying any little extra thing or a magazine gum, it doesn't matter what it is. I just leave my credit cards at home and just work with cash. Well, Courtney, thank you so much for talking with us about this and the retail therapy, as in the overspending therapy. We appreciate it so much. My pleasure. Thank you. page from my book, understand that the way you're already spending your money shows you your priorities and know that you might have to adjust that a little bit to set yourself on the track for long-term financial success. Let the 50-30-20 budget that we talked about be your guide. So needs come first. The idea is to keep your housing and transportation, insurance, food costs, all that

stuff you need to survive to less than 50% of your total monthly spending. Next is wants. That's the 30 of the 50, 30, 20. Wants are things like travel, entertainment, designer clothing. Finally, that last 20% is really important. This is the portion of your money to devote to savings and debt repayment. And just really quickly, since all of these things we could devote entire episodes to, but we're talking about your emergency fund, your retirement savings, 401k and IRA, and importantly, money to pay off any high interest debt that you've got. That's a really good point, Dayana. And that's it for today. You can get more on this at nerdwet.com slash podcast.

Do you have a money question of your own? You can text us or call us at 901-730-6373. That's 901-730-NERD. Or you can email us at podcast at nerdwallet.com. And finally, a brief disclaimer courtesy of the NerdWallet legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes. And with that said, keep it nerdy!