Yes, we keep saying make sure you spend within a budget. However, as important as it is to make a budget, it is also important that your income is properly allocated in a budget.
So, what’s the best allocation plan? Well, I’ll say it depends on you and your financial situation.
There is the popular 50:30:20 rule popularized by Elizabeth Warren (in her book All Your Worth) which explains that you spend 50% on your need (basic expenses-rent, transport, feeding etc.), 30% on your wants (lifestyle-vacation, studies, recreation etc.) and 20% into savings and investment (emergency savings, long term investments, retirement plans).
Are we saying this is the perfect plan? No. this is just a guide. It may not suit your lifestyle. You may be one who currently do not have much obligations. For example, you are living with your parents- you do pay rent and may not spend much on feeding. By spending only 20% on your investment, you are likely under-utilizing your money. Another example is someone who has so much obligations (maybe a family person), using 30% on lifestyle may be too much of a luxury for the person.
When allocating your income- consider your age (in your 20s, you may not have so much responsibilities. This is a great opportunity to put a large chunk of your income into investments).
Also, consider that the extent of your needs. This should guide in setting appropriate allocation for your investment. You shouldn’t be cash strapped short term and have so much tied up in long term investments.
Whatever plan you are going for, ensure that these three classes receive proper allocation.
- Ensure you savings/investments is not less than 10-20%
- Ensure that needs are kept in reasonable allocation. Go for a more economical alternative, where possible. For example, you know your income size, don’t get a car that its maintenance would have much effects on your income.
- Ensure you also pamper and develop yourself. Give it an appropriate allocation. Read books, take courses frequently, travel (within your budget) and enjoy life!
We believe in you!
To your finance independence and freedom.