We cannot do anything without money. Saving might not be an easy task, but come to think of it, saving up a few pounds each month for a few years would rise to a jaw-dropping amount. Welcome to my blog home of all things financial management and lifestyle. Before we go any further be sure to subscribe to my newsletter, share and comment on this blog. It means a lot to me and the channel. Okay, today’s topic is simple; how much should you be spending yearly and what should your annual budget look like. Let’s head to it.
The rule of 50/30/20
When it comes to successful money management and building your wealth, this is among the best rules to achieve your goals on saving. The basics of the rule begin with your “After-Tax Income”. When you have paid your tax, try to channel 50% of the income on vitals needed for your to lead a normal life: rent, bills, food etc. Spend 30% of the income on your wants including; new wears, cinema, vacations and more. Then spend 20% left on savings.
How effective is this rule?
Let’s analyze this. Going by this rule if you save 20% of your income and invest it in an investment that gives about 7% yearly profit, you will need over 37 years to be able to retire well. Following the rule also you will be able to spend 4% of the income for the rest of your years to be able to maintain a reasonably good lifestyle. Now this all looks good but really who wants to save for 37 years? Not me.
Also, this rule can be ineffective when you are earning a lot per year. Let me explain. Let’s say you make an after-tax yearly income of £50,000; you will be spending £25,000 on needs, £15,000 on wants and £10,000 on savings. This seems reasonable for every ordinary person right, well lets up your salary a bit and say you are yearly earning after task £100,000. That means you will be spending £50,000 on needs, £30,000 on wants and £20,000 on savings. This seems a bit much don’t you think, let’s not even talk about you earning an annual of £500,000?
Recommended spending on every category
So here is my recommended spending routine that seems more reasonable for everyone.
According to experts, housing should not exceed one-third of your annual budget. That is for every £3,000 you earn you should spend a thousand pounds. But I say that you spend somewhere between 20 to 25% of your income on housing. Although this might be difficult to achieve, depending on the area you live and if you make below £100,000 a year. You can beat this though by finding cheaper housing, renting spare rooms, getting a flatmate or whatever option you find.
Experts say you should not spend more than 10-15% of your income. Depending on how much you make, this seems reasonable. For instance, a person who has £40,000 annual budget after tax spends £330-£500 in a month on food items. This seems okay, but if your income rises, then it can be a bit much. I say, don’t go beyond £600 to £750 on food monthly.
Cost of transportation
This depends on the proximity of your workplace to your home. Of course, if you live farther then, you will spend more, but my suggestion is this. The cost of your transportation should not exceed 15% of your income. That is depending on your income. Otherwise, if you choose to get a car, the total price you pay for cars should not exceed 35% of your annual budget. An example of this is if you make £50,000 as your yearly earnings, £17,500 is the most you should spend on getting a car. This includes your insurance, gas, repairs, and so on.
Dave Ramsey’s method of savings says transportation costs shouldn’t exceed 10% of your income. He goes on and says; If you do not need to buy a new car, do not buy it except you have a net worth of a million pounds. I say though that if you opt for a new car, it should not exceed 25% of your yearly income.
This includes health, insurance, utilities, and lots more. Most of the professional budgets recommended by experts say 10%-15% of income should take care of this. Depending on how much you make, health insurance should be about 5% or more of your annual income. You should spend £50-£250 of your income on utilities each month depending on where you live. Then 10% of your income should be allocated to whatever else you want to do. Yes, I said it, spend 10% of your yearly income whichever way you want. That’s what I like to call ‘me money’, and I recommend it for everyone.
Saving your leftover money
With the 42% left of your income, here is a prudent way to use the rest:
Max out your 401K employer match:
If your employer offers this, this can also add up to your savings. And it’s generally free money so support it.
Pay off debts or create an emergency fund
If you have debts to pay, 5% of your remaining income should settle it. If you have no debt to pay, you can build up a six months emergency fund in a high-interest savings account. This would prepare you in case of emergencies.
Consider going for ROTH IRA, any profit you make within this is completely tax-free after the age of 59. Otherwise look for a high yielding stock, ETF, BOND, or other types of investment. You could also choose to put it into a real estate investment.
Finally, it is recommended that you start tracking your expenses by cutting down budgets that are not necessary. This will help you to save more and maybe retire earlier.
Not having a pre-planned annual budget could result in extravagant spending, but of course, you cannot budget every single penny. You can, however, try to budget as much as you can and see where each year takes you. Thank you for staying with me and be sure to subscribe before leaving. Also, hit the share and like button. If you have any comments, then do not hesitate to leave it.
© Lifestyle Tips by Antoaneta
RECOMMENDED FOR FURTHER READING: