What a loaded topic - each person out there seems to have a VERY different philosophy around the topic of how to manage money!
I know for me, it’s harder to spend than save. But for others it’s easier to spend than save. There isn’t really a right and wrong way to do it! However, I do believe that there is a good, better, best system with how to manage your finances.
But it’s really about balance. You can’t just always only save. And you can’t just always only spend. Eventually both of those systems will fail you.
What I find has worked the best for me and my family is the plan below. It maintains order and balance, and ensures that there is saving and spending, and enough to cover everything else.
The breakdown goes like this (description is below):
10% - Long Term Savings
10% - Giving (can be 5%)
10% - Savings for Spending
10% - Fun Money
10% - Debt Repayment
50% - Expenses (can be 55% is giving is 5%)
10% of your income should go directly to your long term savings (aka retirement savings). You should always, and I repeat, ALWAYS pay yourself first. Lots of people say they can’t afford to do this, but I say you can’t afford not to. If you feel like there isn’t enough money coming in to do this, maybe it’s time to rethink how you’re spending the rest of your resources. This money should not be spent, but should accumulate over time to act as retirement savings.
10% of your income should go directly into a giving fund. Some people think this number is high so this part is discretionary for some people (I know people that use 5% for this number instead). For me, it is a fixed 10%. I believe strongly in the notion that you reap what you sow, so if you’re willing to give of your resources, it will come back to you (and it usually comes back tenfold!). Now, this percentage of your income can be given to whatever source you choose. Maybe you attend a church and want to give back there, or maybe you believe strongly in the work of Big Brothers, Big Sisters and feel that your resources could be used for great things there. Wherever you give it, make sure that you give it with a joyful attitude
10% of your income should go to savings for spending. This part of your income would be for things like a holiday, a new car, a new house, etc - anything that will require you to save over time to purchase. Then, once you have enough saved to purchase whatever it is you’re saving for, spend it and start over!
10% of your income should be fun money! This money can be spent on whatever you want/need. Things like new clothes, entertainment, gifts, and whatever else is on your list.
10% of your income should go to debt repayment. You should always work at paying down your highest interest debt first - make minimum payments on the others until the highest interest debt is paid off. Then, move to the next highest interest debt until you no longer have any debt! If you don’t have any debt, then this extra 10% can be added to whichever category you like!
50% of your income should go towards your expenses. This covers everything from your mortgage/rent payment, to groceries, to car payments, to fuel, to medical expenses, etc. For those of you who prefer to allocate 5% (instead of 10%) to the giving fund, the extra 5% can come back here (so you have 55% of your income for expenses).
One final tip - I find it works best to have separate accounts for each category. That way there is no confusion!
So there it is! I know people who think this budget is unreasonable, but the truth is, these are the people who are up to their eyeballs in debt and NEED to make some changes to their financial health. It might require some changes and sacrifices now to get where you’re trying to go - it definitely isn’t easy, but it really is worth it.
To reiterate, this is what works for me - it doesn’t have to be what works for you! Maybe it’s just a starting point…
Comment below with what works for you!