When we talk on budgeting, we talk about having a budget ratio which clearly states the percentages of your income you spend on your needs, wants and savings/investment.
When you spend within this budget ratio, it becomes your spending ratio, especially when you spend your regular income within this ratio.
There is the 50-30-20 rule popularized by Elizabeth Warren which explains that you divide your after-tax income in three portions- 50% going to your Needs, 30% going to your Wants and 20% going to your Savings/Investment. There is no one-size-fits-all approach to spending; however, this can serve as a guideline for you in constructing your ratio.
Identify your needs and your wants. Your needs are essential expense items that you need to survive e.g., food, water, rent, basic clothes, etc. Wants are items you desire; however, they are not needed for your survival (e.g., vacation, luxurious items).
Next, apportion an amount to savings and investments. Experts suggest that at least 10% of your income should be allocated to investments. The next step is to identify the percentages of your needs, wants and savings/investment to your total income. This is your spending ratio.
Knowing your spending ratio has a lot of benefits. One of these is that it helps you see immediately how spend your income. You can see from your ratios if you are spending (more than you should) on your wants.
You can also create what you want your ideal spending ratio to be and work your expenses and bills around it.
Another great benefit of knowing your spending ratio is that you can apply this ratio when you have an increase in your income. When your income increases, there is a likelihood of you spending the bulk of your incremental income on your wants (e.g., getting a new phone, going shopping or any luxurious expense); however, when you apply this new ratio, you increase your allocations to your needs, wants and savings/investment.
To your financial independence and freedom!
