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Balancing Needs and Wants

by Kevin McKinley - December 6th, 2015

Posted Under: around the house

We received a recent request from a parent with young children, and she asked for some help -in balancing her family’s near-term spending with the need to save for long-term goals.

Every family is a little different, but a good place to start is a “40/30/20/10” plan, splitting every dollar of income (after taking out income and payroll taxes) into the following categories and percentages.

The basics (40%)

Whether you’re a family of one or one dozen, you can’t live without food. Figure your trips to the grocery store here, along with the costs of dining out (hopefully the latter will be kept to a minimum).

You can also add health care insurance and out-of-pocket costs to this section. Utilities such as heat, electric, water, cable, phone, and internet should be put here, too (although when times are tight, some of these expenses should be reduced or eliminated).

Transportation costs would also fit under this heading, including gas, vehicle repairs and maintenance, and any payments on loans used to purchase vehicles.

Speaking of debt, any other non-mortgage debt payments should also be kept in this category, such as student loan and credit card payments.

Shelter (30%)

The next category is comprised of the costs of keeping a roof over your head. For renters, this one’s easy: it’s the monthly rent payment, along with the cost of renter’s insurance (you DO have renter’s insurance, right?).

Homeowners usually spend more every month, and in more ways. Start with the mortgage payment, but then add property taxes, insurance, maintenance, and upkeep (indoor and outdoor).

Hopefully any major remodeling can either be paid for by saving money, or making a home equity loan payment. As long as you can save an amount or make the payment, and still stay within 30% of gross monthly income after adding in the other expenses mentioned above, it should be a feasible expenditure.

Long-term saving (20%)

That 20% figure might seem daunting to some families, but it’s still a good goal to shoot for, even if you come up a little short.

Start by accumulating a rainy day fund that’s big enough to cover at least three months’ worth of expenses. Then look at saving for retirement, preferably by contributing to a retirement plan at work (and especially if your employer offers to match a portion of your contributions).

You may also want to look at funding tax-deductible IRAs if you can afford to set the money aside for a long time, and are in a higher income tax bracket.

But if you are in a lower income bracket (say, $40,000 in gross income for singles and twice that for married couples), you may want to save for retirement in a Roth IRA instead.

The contributions aren’t tax deductible, but any future earnings will be sheltered from taxation. In retirement, the withdrawals will be tax free. Best of all, you can always pull the contributions back out of a Roth IRA at any time for any reason with no taxes or penalties.

Therefore, the Roth IRA can be a good place to keep your emergency expenses, save for retirement, and even use a portion of it for future college costs. If you can cover your retirement savings needs and still want to save for your kids’ college expenses, consider a 529 plan like Wisconsin’s Edvest (

Fun (10%)

Last but not least, there is the category of “discretionary” expenses, which should be 10% of your after-tax income. This area could include trips, toys, sporting goods, non-essential electronics, and any other purchase that isn’t necessarily a necessity, but might provide you and your family with some joy and happiness.

Speaking of which, this category is a good place to include any charitable giving that you can afford.

Because no matter how strapped you are for cash, there are always going to be millions of people less fortunate than you. And giving whatever amount you can provide plenty of warm feelings in return.