How much should you be spending for a car?

Question How much should you be spending for a car?

Answer 15% of your take-home pay.

Complete Answer To clarify the question, “How much should you be spending for transportation?” The answer is the same – 15% of your take-home pay. It is important to understand that transportation is an expense – it is not an investment nor a way of saving. A car is a depreciating asset.

Each month, set aside 15% of your take-home pay into your Transportation Account. Take money out of that account to pay for your transportation expenses. Walk or use public transportation to get where you need to go. If your Transportation Account never grows in value, that is a good indication that you cannot afford a car.

On the other hand, if the money in your Transportation Account continues to grow in value, you can start considering different options for getting around. For most of us, a car is our transportation. “How to” buy a used car or new car, should I lease or buy a car, how to negotiate the price of a car, et cetera, are beyond the scope of this blog. The focus of this blog is how to plan and pay for a car you have selected.

Generally speaking;

  • You should save 15% of your take-home pay until you have enough to pay cash for your first car. It will probably be used car. This will give you the experience of realizing how costly it is to own a car.
  • You should not put yourself in a position of making car payments and car repairs at the same time.
  • In addition to carrying liability insurance, most lenders will require you to carry comprehensive insurance on a car that you finance.
  • Car maintenance is required for all cars – new or used.

I actually know two people who do not nor do they want to own a car. They walk or use public transportation to get around. For road trips, they rent a car. For each, their respective Transportation Expenses are considerably lower than 15% of their take-home pay. Conversely, I know someone who buys a new car every year. He can afford it, that is important to him, and that is how he has decided to spend the money he has earned.

Financial Literacy Knowledge/Skill

Your Transportation Expenses should not be greater than 15% of your take-home pay.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you get out of  debt?

How should you be using your savings?

Question  How should you be using your savings?

Answer  Use your savings to:

  1. Pay all of your monthly expenses on time.
  2. Pay for unexpected emergencies.
  3. Leverage your buying power to pay for big-ticket goods and/or services.
  4. Fund your retirement.

Complete Answer  Assuming that you have a Spending Plan which includes spending less money than you take home (living at or below your means) and you are saving at least 10% (Pay Yourself First Savings Account) of your take-home pay each month.

1.Pay all of your monthly expenses on time. You will need a checking account that allows you to deposit money (checks and cash), write checks, both electronically and manually and access to your account using an ATM for both deposits and withdrawals. Deposit all monies received into this account. During the month, you will have money coming into this account (income) and money going out (expenses). The important thing to remember and do is you should have 10% of that month’s income left in that account at the end of the month. Do the same thing the next month and the month after and the month after that until you have enough money in that checking account to pay all monthly expenses for one month.

This concept, having enough money to pay all monthly expenses on time, is called operating capital. All successful business do it. It is similar to having money in the cash register at the beginning of the the day. Money comes in, money goes out. At the end of the day you should have more money in the cash register than you started with at the beginning of the day.

Financial Literacy Knowledge/Skills

  1. Have a checking account.
  2. Use savings to help pay for all monthly expenses on time.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you pay for unexpected emergencies?

 

 

Can you afford that?

Question Can you afford that?

Answer By answering these two question you will know the answer; 1. What is your take-home pay for the month? and 2. Is the expense equal to or less than the recommended category amount in your spending plan?

Complete Answer Ironically, as a kid you knew the answer. When your parents gave you $10 to buy your school lunch, you knew you only had $10 to spend on lunch and you spent it accordingly. The same principle applies as an adult. Unfortunately as adults, at times we have to buy things that we cannot pay cash for at the time of the purchase. Most of us could not pay cash for a house or a new car. For those purchases that have to be financed, the same principle applies. What is your take-home pay for the month and what is the monthly cost of the item you are buying.

For Example: Can you afford an apartment? The total expenses (rent, utilities, insurance, et cetera) should not be more than 30% of your monthly take-home pay. Can you afford a new car? Again, the monthly expenses of that new car (payment, insurance, scheduled maintenance, gas, et cetera) should not be more than 15% of your monthly take-home pay. You get to set up the categories and the amounts (percentages) for your spending plan. The important thing to remember is that your total expenses should never be more that 100% of your take-home pay.

Financial Literacy Knowledge/Skill

Know what you can afford.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Is saving money important?

How do you decrease your expenses?

Question  How do you decrease your expenses?

Answer  Cut down on your spending. A skit on Saturday Night Live makes the point very well. In this “commercial parody, a married couple are confused by their money woes, so a spokesperson presents them with Don’t Buy Stuff You Cannot Afford, a guide to prevent financial debt. [Season 31, 2006].”6  

Don’t Buy Stuff You Cannot Afford

Complete Answer   Other than income taxes, you get to decide what and how much you spend. In order to get control of your spending, the first thing you need to do is to know what and how much you are spending. You need to “Track Your Spending”. For example: How much does it really cost to “Take you out to the ol’ ball game?” It will include of course the cost of the tickets. Add to that parking, “peanuts and Cracker Jacks”, and a souvenir baseball cap so you can “root, root, root for the home team”.

There are a number of ways to track your spending. You may be naturally talented at remembering numbers. Great, that will save you a lot time if you don’t have to write things down. For the rest of us:

  • Some people carry around with them a small notebook to record their expenses.
  • Combining a debit card with a checking account is another way of keeping track of your spending.
  • There are a number of apps available for your smart phone that you can use to record your expenses.

Use whatever method or one that you make up, that works best for you. The important thing is that at the end of the month, you know exactly what and how much money you spent. Granted it’s a bit daunting and tedious, but with fortitude7 and a little practice you’ll become quite proficient. I starting by recording my spending in a small notebook. Gradually I progressed to using a spreadsheet on my desktop computer.

Helpful hints: You will have/receive a written record for most transactions; cash or credit card receipts, checks, and bill payment coupons. Most stores will offer a receipt if requested. For those few transactions with no written record; parking meter, vending machine purchases, or coin-operated laundry for example, make a mental note and record it when you have a chance. For those occasions that will involve a number and variety of transactions, attending a church festival or a day at the races with friends for example, count your money before you go and when you come back, the difference is what you spent. Will there be transactions you miss or amounts you couldn’t remember? Yes. Don’t fret, you will get another chance to be more accurate the next day and next month. I find it helpful to make it a daily routine to record my financial transactions from the previous day.

Financial Literacy Knowledge/Skill

Track your spending.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next Week’s Topic:  Where are you spending too much money?

Is your current Spending Plan working for you?

Question: Is your current Spending Plan working for you? Are you making the most of the money you receive? Are you a good manager of your money?

Answer: Only you can answer that question.

Complete Answer: It is safe to say that no two individuals have the same financial situation. We are all unique and our individual financial situations are also unique. There are, however, a few characteristics that are common to good money management (Financial Literacy). Your answers to the following questions will help you determine if your Spending Plan is working for you:

  1. Can you, and do you, pay all your monthly bills on time?
  2. Do you have money set aside for a rainy day?
  3. Is your retirement being funded?

If you answered “NO” to any of the above questions, your Spending Plan needs a little work. Be assured that you are not alone: One third of us are behind on our debts3, about one half of us could not come up with $1,000 in case of an emergency4, and one in three Americans have saved $0 for retirement5. 

Financial Literacy Knowledge/Skill: A good Spending Plan will enable you to pay all your monthly bills on time, put money aside for a rainy day, and save for retirement.

Comments or Questions: Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and questions you may have about managing your money (Financial Literacy).

Next Week’s Topic: Why are you having money problems?

 

What Does a Spending Plan Look Like?

Question: What does a Spending Plan (budget) look like?

Answer: A typical Spending Plan would be laid out like this:

Net Income 100%
Pay Yourself First (Savings) 10%
Housing 30%
Transportation 15%
Health & Medical, Giving, Retirement, Debt Paydown, et cetera 20%
Lifestyle 25%

Complete Answer: Most of us would have the above categories in our individual Spending Plans. Because we all have different values, interests and priorities, your Spending Plan will be unique to you. The above Plan is only provided as a guide. Additionally, your income and expenses vary from month to month. You get to decide what categories are included and how much is spent for each in your Plan.

Financial Literacy Knowledge/Skill: Using the above categories as a starting point and categories that are unique to your circumstances, you should be able to clearly state how much (percent of net income) and where you are spending each month.

Comments or Questions: Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and questions you may have about managing your money (Financial Literacy).

Next Week’s Topic: Is your current Spending Plan working for you?

 

How do taxes affect your Spending Plan?

Question: How do taxes affect your Spending Plan?

Answer: You have already answered that question.

Complete Answer: Taxes decrease the amount of money you have to spend in your Spending Plan. If you can describe your income and expenses for one month, the “money your received” (income) is in reality your “net pay”. Net pay, also known as disposable income, is the amount of money you get after taxes have been subtracted from your gross pay (total amount of money you earn). It is of critical importance that you understand that your spending plan is based on the money you have to spend (net pay) and NOT the money you earn (gross pay).

On the subject of taxes:

  • If you receive an income tax refund at the end of the tax year, too much was withheld from your pay. If you have to pay additional income tax, not enough was withheld from your pay. You get to decide. Contact your employer if you want to adjust the amount of money withheld for taxes from your pay. It costs nothing to do so.
  • My personal goal is to have the exact amount withheld from my pay that I owe.
  • If you come into a chunk of money and think you might owe taxes on it, contact the Internal Revenue Service (federal) and your state department of taxation for the forms to make estimated tax payments. Again, there is no cost to you. You get to decide.
  • Whenever I receive income of which no part was withheld for taxes, I make estimated tax payments or simply put money aside in anticipation of taxes owed.
  • The best advice concerning taxes came from Jesus, “. . . repay to Caesar what belongs to Caesar . . . “.2  Pay the taxes you owe and be done with it.

Financial Literacy Knowledge/Skills: Your Spending Plan is based on your NET INCOME. Pay the taxes you owe and go from there.

Comments or Questions: Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and questions you may have about managing your money (Financial Literacy).

Next Week’s Topic: What does a Spending Plan (budget) look like?