(Newswire.net — July 2, 2019) — The wise say if you don’t plan, then you are planning to fail. This is an indisputable fact when it comes to financial matters. What do you think is the difference between success and failure in businesses and matters to do with finances in general? I will tell you for sure the difference lies with planning. Let me turn the question a little bit – why do you think individuals on the same level of income have different life status? It is common to find someone in a lower income level has accumulated a lot of wealth than even someone in a higher income level. All of this can be attributed to planning. While it is true there are so many underlying factors when it comes to spending, effective planning translates to success. In general, successfully people handle their finances objectively. When they receive their monthly earnings, instead of improving their status in the short run, they would often invest and use the earnings from the investments to better their living standards in the long run. In this discussion, we are going to discuss how you can effectively plan for your expenditures.
As we talk about the part of your income that should be devoted to bills, we want to acknowledge the fact that some people are good at saving while others are just not good. But the difference between these two people may not be something new. Individuals who are good in saving put into practice one of the most important life lessons – “always live within your means” and they do their best to cut their living expenses, ensuring they are lower than what they earn. On the other hand, people are not good at saving often overspend on basic wants. There is yet another category of individuals who often go overboard, using more funds than what they earn. As a result, they accumulate debts and if they don’t come back to their senses, the situation becomes dire and ruin their financial life.
Irrespective of how old you are, it is very to consider paying yourself first every month. What does this mean? A time will come when you will have to retire or become less productive financially. Where will you get funds to finance your life? You don’t have to be a burden to your family. It is absolutely ridiculous to think you will the responsibility of your children. For this reason, you should start saving for retirement as well as for emergencies. That is what it means to pay yourself every time you receive your earnings. The best way to go about this is by setting a budget to help you manage and always keep track of all your expenses, ensuring you are left with something to save for your other life targets.
How Much You Should Spend on Bills
The first thing you need to keep in mind while setting up your budget is determining the amount of pay you take home. Incontrovertibly, your salary cannot be the actual figure you carry home. Let us see the basics here.
- Taxes. Generally, there is a portion of your salary that will go to taxes. This is an obligation you have to obey. For instance, if you earn an annual salary of $60,000 and you happen to be in a tax bracket of 25%, you probably have to pay a tax worth $10,800 from your income. This means you will be remaining with at least $49,200. That is probably $4,100 to be spent on bills and savings. It is important to remember that this tax rate does not indicate the actual rate charged on all your earnings. The effective tax rate is often lower.
- Housing. For an average individual, this is often the greatest expense. It is vital to keep housing expenses to the minimum possible. Nevertheless, never spend more than 30% of the income you carry home on housing. Are you a homeowner, well, this figure also takes into consideration your mortgage payment but also the regular property tax along with insurance payments.
- Use a 50/20/30 rule. As you develop a budget, try to enlist each of the monthly expenses as its individual linen item, or put together some of them and apply the 50/20/30 rule. This strategy puts together all your expenses, making it easier to track them. It will help you break up all the expenses into the following three categories:
a) The fixed costs. These are expenses incurred regularly and include rent, or perhaps a mortgage, cable payment, and auto payment. These costs should cover up to 50% of your earnings and not more than that.
b) Variable cost. Unlike fixed costs, these are expenses that change and may include entertainment, clothing, and more importantly grocery. These expenses should take a maximum of 30% of your monthly income and not more than that.
c) Savings. This is an important section of your budget as we earlier mentioned and should take at least 20% of your total income. Why do we say at least? You’d realize we capped the first two expenses. Well, the reason is, any extra income should be devoted to savings or debt payment. The fact that you will be paying yourself and that you can benefit significantly in the future should motivate you to save the maximum amount possible.
This is the best strategy to determine much you need to spend, especially on fixed costs. Limiting your expenses to 50% will leave you with enough funds to accommodate the variable expenses. Having 30% of variable costs will also be good enough to keep you going without struggling. If you have a debt to pay and in need to borrow a quick cash check out Loan Advisor and compare different loans online and see how best to pay.
The Bottom Line
How Much of Your Income Should Go to Bills? From our discussion, a maximum of 80% after paying tax should go to bills. The remaining 20% should be devoted to savings. You can successfully apply this rule if you learn how to differentiate essential expenses from non-essential ones. Remember essential ones must be accounted for first because you cannot do without them. Make it your aim to limit the non-essential cost and you will be financially healthy.