New Year, New Goals
Pressing Reset on Our Financial Lives
by Alacias Enger
A&U reader Leah is married to John, a department store manager. She also has a high school aged stepson, Wesley, whose living arrangement is split equally between both of his parents. Leah is an office manager whose company supplies her with a 401(k) and health benefits which she couples with a copay program for her medications. During the pandemic, John was temporarily laid off, and was able to focus much of his attention on helping his son Wesley to be successful with remote learning. Fortunately, between John’s unemployment and Leah’s steady income, they were able to make ends meet, and just as Wesley has returned to learning in the classroom, John has returned to managing his department store.
Although Leah and John have weathered the financial storm associated with COVID-19, their ability to cash-flow any extras was greatly diminished. This was further complicated by the additional spending John and Wesley did out of boredom while they were at home. John found himself spending more than usual on entertainment, games, and the like. Subsequently, John and Leah relied on their credit cards for holiday spending, which they admit they may have overcompensated on, and are carrying forward a balance as a direct result.
January is an optimal time to press the reset button on our financial lives, setting ourselves up for success throughout the remainder of the year and beyond. The first step is to take stock of where we’re at. Leah and John overcompensated for a rough year by consistently overspending their entertainment budget which resulted in also overspending at Christmastime. Where they didn’t used to have any credit card debt, they have now incurred balance of a little more than $2,000. Furthermore, Leah’s student loan payments, which have been paused over the duration of the pandemic, will once again enter repayment after May 1. So, like millions of Americans, Leah needs to prepare her budget for those monthly installments to be reinstated.
The 50/30/20 Budget, popularized by Senator Elizabeth Warren (D-MA), represents a simple way to prioritize your spending. This categorizes monthly spending into three basic categories:
Flexible or Lifestyle Expenses, and
Fixed Expenses are generally needs like mortgage or rent payments, health insurance or medication costs. This category should represent no more than 50% of your after-tax income so as to leave enough space in your budget for other priorities. Flexible Expenses is oftentimes also called lifestyle spending because it tends to be largely composed of wants and other expenses that can be cut down on if needed. Under this budgeting system, 30% of your after-tax income is allotted to lifestyle spending, leaving 20% to Goals.
Once Leah and John calculate how much of their after-tax income should be allocated to each general category, they need to determine what goals they want to focus on. They identify the need to pay off the credit card, prepare to start making Leah’s student loan payments again, and save for retirement. They both have access to 401(k) plans at work and are contributing up to the match. This leaves more than enough remaining in that category to reabsorb Leah’s student loan payment and pay extra to the credit card. Once the payments resume, they should only pay the minimum student loan payment, focusing the bulk of their extra funds on eliminating the credit card balance. If they want to expedite matters even further, they might look for places they can save money in the lifestyle category. Some places to investigate possible savings might include checking for cheaper cell phone plans, meal planning to save on groceries, or temporarily cutting back on subscription services. While some of these measures might be strictly temporary, others, such as cell phone plan reductions, can yield a significant ongoing savings. These savings can serve to reach financial goals much more quickly.
Once the credit card balance is paid off, they should turn their attention toward eliminating Leah’s student loan balance, achieving debt freedom. Her balance is just over $30,000 which can feel like a mountain to climb, but with focused application of funds from the appropriate budgeting category, they should be able to achieve debt freedom in no time. Once debt freedom is achieved, they can increase their retirement savings and turn their attention toward a new set of goals.
A new year represents new opportunities for sculpting our present as we build the future we desire. It doesn’t have to be overwhelming; just stick to the fundamentals and prioritize goals that lead to the future you deserve.
Alacias Enger is a performing artist, writer, and educator. She lives with her partner in New York City, and is the founder of blogs “Sense with Cents” and “Travel Cents.” If you are living with HIV/AIDS and would like to stay on top of your personal finances, emailquestions to [email protected] for possible inclusion in Money Matters. Follow her on Twitter @sense_w_cents.