6 Tips For Managing Your Money Wisely, Part 2

So far, we've covered the basics of establishing your budget, making a plan for your money, and handling your finances. But it's time to get down to the nitty gritty.

Knowing where your money goes is just one aspect of managing it wisely. It's also important to know how much income you need to live comfortably and what percentage of that you could save without experiencing too many lifestyle changes.

In the first part of this series, we talked about the importance of setting up a set budget for your money. This is the only way you can ensure that you're making smart money decisions from day to day. You don't want to be saddled with an emergency fund or any other emergency fund when things start going south. By keeping a close eye on your savings and expenditures, you can remove things like debt and unforeseen expenses from the equation while still having enough money to make ends meet. And we've already discussed how important it is to have something left over at the end of every month.

How much money should you set aside each month?

Not every household has the same spending habits, nor do they have the same lifestyle. Some people are comfortable with much less than others. Some want to eat out more often while others want to save their money on restaurants and other luxuries. It's all relative, isn't it? But how do you determine how much of your monthly income you actually need and how much is it okay to spend? Keep in mind that most people need two incomes these days to support a family, but you can also adjust your budget accordingly if you or your significant other is working less.

We've already talked about how to set up a budget, but how much of your income should you be sticking to that budget? If you were to take 50% of your income and then stick to a strict $15,000 monthly budget, you'd come up roughly with $10,000 a month to spend. That translates into just over $125 in savings. If, however, you're willing to cut it down even more and only have 30% of your income saved, you'll have roughly an extra $150 every month. That could be used for vacations, indulgences or any other expense that isn't necessary for your day-to-day life (or indeed needed at all).

To keep it simple, here's a very basic formula that demonstrates the importance of having at least 30% of your income saved:

(Monthly Expenses - Income) / 30% = Savings Needed per Month

For example, if you have $2,000 in monthly expenses and $3,000 in income each month (after taxes), divide $3,000 by .30 to come up with $1,500. You would need to save about one-third of your monthly income ($500) if you want enough money for unexpected expenses or larger purchases.

The main thing to remember when you're setting up your budget is that it needs to be flexible enough to accommodate both your income and life's expenses. You don't want to be stuck in a situation where you have no fall-back if things go wrong. And you don't want to have saved all the money before you get out of debt!

After establishing what percentage of your income that should be, the next step is figuring out how much savings actually equals. The best way to do this is by being very conservative with your calculations and being prepared for unexpected expenses. A common way for people who are just starting out is by setting their monthly budget at exactly 50% of their monthly expenses, as mentioned above. After all, you don't want to overspend and put yourself in a vulnerable position.

What are you cutting out of your budget to save money?

This is always the question every couple asks at some point – and it's a valid one. One of the first things many couples do is cut out all unnecessary monthly expenses, whether it's eating out at restaurants, buying new furniture or paying for cable TV. Once you've established your budget (and stick to it), you'll notice that there will be some amount of individual spending money untouchable by the budget itself. This is because there are certain things in life that are necessary and another, large amount of expense that can be squeezed into the budget.

If you're having trouble deciding what you should cut out to save money and still have an enjoyable life, here are a few things you can cut out or consider down the road:

Paying for Cable or Satellite TV (keep this to $15/mo. or less) – This is another one of those expenses that many people don't realize they're paying for each month until it's already racked up on their bill. This is a very common mistake by people who don't realize how much they actually spend on packages like HBO, ESPN, Starz, etc. You can either pay for an Internet package that includes TV channels like Hulu, Amazon and Netflix for homework or for the premium channels on top of it or you could get rid of cable altogether and use free TV instead. I recommend paying for these services and equipping your house with a Roku box to stream content from your tablet or computer if you still want to watch TV. It's a lot cheaper than paying Comcast $200/mo. for bandwidth that you don't even need.

Paying for the Car – Again, this is another one of those things that most people don't realize they're paying for until it shows up on their monthly bill. If you're getting a car loan, make sure you have plenty of cash on hand to pay for insurance, gas and maintenance as well. Again, a lot cheaper than paying someone else to do all this work for free. You can also get ridesharing apps like Lyft and Uber if you don't want to drive or if your car has problems and can't be fixed any time soon.

Cable/Networks/Media – If you're playing a lot of video games or streaming TV shows or movies, you probably have some kind of contract with your cable service. You should always check these contracts to see if they're worth it or if you can get a better deal elsewhere. Amazon Prime is a great option to replace your cable service without paying for new packages and all the extra hassle that comes with them, especially if you don't need HBO, ESPN and all those other premium channels. And Netflix is cheaper than many other packages and offers more content for less money as well.

Conclusion

If you're serious about getting out of debt, you definitely need to be budgeting your income. I highly recommend that you sit down and do this with your significant other so that you can both be on the same page financially. Remember that each situation is different, so don't take my suggestions as a rule of thumb for your own financial situation.

It's important to note that this entire discussion should be held with your partner in person or at least by phone. While budgeting is a crucial part of getting out of debt, the most important thing is to discuss these personal and sometimes embarrassing financial matters face-to-face.