Make Your 2016 Financial Resolutions a Reality

One of the most common New Years resolutions in the United States (and probably around the world) has to do with personal finances. Out of all the things that January 1 serves as the perfect opportunity for, perhaps the biggest is a chance to really get out from under whatever money-related hiccups you experienced in the last year and really start yourself on a solid path to financial success.

Like with most resolutions, however, a lot of people really see this one as a lot easier said than done. Sure, it's one thing to say that you're going to start saving money as soon as you get your first pay check in a new year - it's another thing entirely to actually do it. Plus, how do you take into account all of the things that you can't even really take into account for? Your monthly utility bills probably fluctuate wildly depending on the season, and a sudden rent increase can really make things difficult when you least expected it.

Luckily, as with most things, our old friend "math" is here to shed some light on this all important task by way of a handy little concept called the Life Budget.

What is a Life Budget, Anyway?

A Life Budget is a handy little mathematical idea that allows you to better manage all of your various monthly expenses based on real-world numbers regarding the average amounts that people just like you are spending in those exact same ways. One of the biggest issues that many people have with managing money is figuring out exactly what to do with it when you have it.

You don't need a savings account with thousands upon thousands of dollars in it to feel comfortable and secure (though this really isn't that bad of an idea and you should probably get to work on it regardless) - you just need to know exactly how much money you should be spending in which ways when that ever-important paycheck does finally arrive.

Crunching Some Numbers

As previously stated, the Life Budget works using numbers based on averages from the world around us. By taking the total amount of money that you make in a single month, you can find out what percentage of that income is supposed to go to things like utilities, healthcare, entertainment, your existing debt and more. As of 2016, the percentages break down as follows:

• Housing: 24%
• Food: 14%
• Transportation: 14%
• Debt: 12%
• Savings: 9%
• Healthcare: 6%
• Entertainment: 5%

There are a few other categories built into the Life Budget, but for right now lets focus on these as they're the ones that apply to the largest amount of people. The Life Budget also says that you should be giving away 4% of your monthly income to charity (which isn't a bad idea when income tax season rolls around, all things considered), but this isn't necessarily something everyone is in a position to do.

Life Budgeting in Action

So lets say you make $5000 every month between one or more paychecks from your job. According to the Life Budget, 24% of your income should be going to housing - IE rent or your mortgage payment.

If you want to find out exactly how much money that really is, first express 24% as a decimal by writing it as 0.24. This isn't necessary per say if you have one of those fancy graphing calculators, but it makes things easier so we'll just do it anyway.

At that point, the equation becomes 5000 x 0.24, which equals 1200, or $1200. In essence, this means that someone who makes exactly what you do can afford a rent payment or mortgage payment of around $1200 per month. Obviously, if you lived in a household with two incomes, you would want to add both monthly income amounts together to come up with the base amount of money you're supposed to use.

Finding out all of the other categories is the same process. Entertainment at 5%, for example, would be 5000 x 0.05 = 250, or $250.

So What Does This Tell Us?

By figuring out how much money you're "supposed" to be spending in each category and comparing it to the amount of money you actually are spending, you can easily identify certain things to cut out of your life or adjustments to make to start getting on a much more solid financial path. If you're only supposed to be spending $250 a month on entertainment and you're spending much closer to $1000, congratulations - you just figured out why you never seem to have any money. Try to get your actual spending in line with the Life Budget for the best possible results in the new year and beyond. It's really a lot easier than you think.