By Trevor Hammond
With every dollar you have, there are only three things you can do with it:
1. Spend it
2. Save it
3. Pay down Debt with it
This applies to really any amount of money you might have, or will have. What do YOU do with your money? How do YOU make the important decision every day on whether you will spend your money, save it, or pay down debt with it? What knowledge do you rely on to help ensure you are making the best decision each time so that you are on the right path to your financial goals?
As most statistics show, the average savings rate in America is dismal. I usually see 2% of people’s income as the average. This then means that 98% of people’s income goes to spending or paying down debt. Given the fact that Americans typically have far more debt than they should, it goes to reason that the majority of money is allocated to spending.
There is nearly unlimited advice on what you should do with your money each month. In general, you probably already know that you (and all of us) should be spending less and saving more. Sounds simple, right? Yeah, simple, but not always easy…
Action Step: Take a little time to determine how much of your money goes toward each of the three options. It helps to block out one hour and log in to your bank accounts online or look at your monthly statements over the last three months.
Look at how much you deposited, or brought in. Then, review how much of your money went OUT in the form of spending, or paying down debt, or hopefully even into a separate savings account! Also, count any money that went into your employer’s retirement fund that you contributed pre-tax from your paycheck…that counts for saving!
Once you have the totals for spending, saving, and paying down debt, convert them into a percentage. For example, let’s say you bring home (deposited, after-tax income) $5,000 per month. Then you determine that $2,200 goes out debt payments (mortgage, auto loan, credit cards); and you have $500 automatically transfer into a savings account each month as well. The rest gets spent on discretionary and non-discretionary items (food, gas, insurance, gifts, utilities, etc.). Here would be your results:
- 44% of your money goes to pay down debt ($2,200 dived by $5,000)
- 10% of your money goes to saving ($500 dived by $5,000)
- 46% of your money is spent
How do the numbers feel when you see them? How can you increase your savings and spend less? Are there ways to better manage your debt to eventually be debt free of everything but the mortgage?
There is no right answer here…but awareness goes a long way to improving habits around what we do with our money each and every month!