How to Create a Budget Using TSL
Use This Method to Create a Smart Budget
The new year has just begun, and if you haven’t put together your budget quite yet, it’s time to get started. If you aren’t sure where or how to begin, try the TSL approach: Taxes, Savings, Life. The goal is to strive for the following percentage breakdown of every dollar you earn:
Taxes = 30% to The Fed and State
Taxes take a big bite out of all our paychecks and it’s critical not to overlook them when you’re planning your budget. Be sure that you know how much you really pay in taxes, and this includes all of your taxes: federal and state income taxes, FICA, Medicare, capital gains, property, and sales tax.
Savings = 20% to a 401(k) Plan or to Pay Down Debt
Allocating 20% of your income towards savings is a significant number, but if you take into consideration the many tax-advantaged ways to save such as a 401(k), 403(b), 457 or a SEP IRA, you can get there a lot of faster than you think. If saving 20% seems overwhelming, just start somewhere and work up to it. You will get there sooner than you think.
Life = 50% for Food, Housing, Fun and Everything Else
The remaining 50% of your income that is left (this number may need to be adjusted based on your personal tax situation) is truly the money that can be used for discretionary spending. As long as you’re using TSL correctly, it doesn’t matter exactly you use this money. But, if you want to make the most of this money, try directing it toward life-enhancing hobbies.
TSL Guidelines Remove the Guilt
One of the reasons I like the TSL guidelines is because they take away the guilt factor. As long as you are hitting your numbers, you no longer have to worry about what society deems wasteful. If you are within your budget, and an Iced Vanilla Buttercup Triple Mocha Latte makes you happy—you have a green light to buy it and enjoy it! Since you are being pound-wise, you can afford to be penny-foolish. You can spend your pennies on whatever you want, as long as you get the big things right.
Simple TSL Worksheet
Fundamentally sound spending and savings habits—TSL—can make you the master of your choices. Use the TSL guidelines and don’t get greedy. Trust that if you plan well and save judiciously you will have enough to provide for an early and happy retirement. Take the first step today with the simple worksheet below. First, tabulate your monthly income, including every single dollar you earn:
Rental Income =
Trust Fund Income =
Under-the-Table Income =
Total income = ____________
Now, apply the following formula:
Total income X 30% = ____________ in Taxes
Total income x 20% = ____________ in Savings
Total income x 50% = ____________ for Life
The TSL approach is a guilt-free way to spend your discretionary dollars after you have paid your taxes and put money into your savings. If you already have several working years under your belt and haven't applied this formula yet, then there’s no time like the present.