So many of you understand that you should be saving and allocating different amounts of money to different funds such as savings, IRA, spending money, etc.
You receive a paycheck and now what? You know you need to put money aside for major life expenses and even small expenses; how do you allocate the perfect amount so that you still have spending money left over but not too much.
First off, let’s go over some major expenses: rent or a mortgage is probably the largest expense you’ll have. Traditionally, no more than 28% of your monthly gross income should go to your monthly mortgage payment. For example, if you make $50,000 annually, you should spend $1,166 on your monthly mortgage. I am going to group all other debts into one category. For all other debts, a good guideline is 36% of your total gross income. Spending above your means is a huge problem in the United States which is partly because we live in such a materialistic society. Doing so can throw off your budget and quickly eat away at your savings and leftover money.
Once you have paid off your monthly expenses, here’s the hard part: what to do with your leftover money. This stage is where many people flounder and is the cause of why people cannot go up in class. After all the expenses, you have a chunk of change that is so tempting to spend. If you spend all of this money, you will be living paycheck to paycheck and never be able to progress.
Depending on the goals you want to accomplish, the timeframe you want to complete them in, and how expensive they are will determine how you allocate the remainder of your money.
For short term goals, allocate a higher percentage of your leftover income so you can save for it quickly. Typically, short term goals are less expensive and long-term goals are more expensive. Although there are some exceptions but for the most part, this rule holds true.
For longer term goals, you can allocate a smaller amount than a short term goal, depending on your situation. You have more time to save for this goal and you can put this savings in an investment vehicle so that your money makes money. Once you complete a goal, if you do not have a new one to save for, you can divide the money you would normally save for that item to other savings goals you have.
The fun part
You should always save a little extra money from each paycheck for fun activities such as shopping or going out to eat. I am a firm believer in enjoying my life and that requires spending money. Whatever money you have leftover should be your designated spending money. If you do not have a lot of money left over, consider reevaluating your expenses and see if you can save money here and there. It could mean looking at your grocery list and cutting back on unnecessary goods, turning off all your lights to save on your electric bill, or even checking for discounts on your home and auto insurance. Whatever money you save can make a huge difference to your life.
Trial and error
This is all about trial and error. You may find that you want to tweak your percentages for your money allocation to better fit your lifestyle. Whatever you decide to do, make sure you are paying off your bills and other expenses before spending money on recreational things. If you don’t, you could rack up a lot of debt!
Choose the Right House for Your Budget, accessed 2019.