Are You Within the Recommended Guidelines for Your Monthly Expenses?
Are you confused by all the financial advice out there, telling you how much you need to be saving each month? I know that I used to be! Would it help to know if you are within the recommended guidelines for your monthly expenses?
Have you got into a spin about what percentage of your income you should be investing into a pension? You know, so that you’re not eating cold baked beans in your old age (unless that’s how you roll)?
Do you ever wonder if you’re spending far too much of your income on things you enjoy? Are you worrying that those items are costing you more than the actual price tag – like your financial health?
Stressed because you can’t save what (insert financial guru) recommends you save each month due to struggling to afford the basics? (I know, I’ve been there) Well, please read on, friend…
Let me first say that there is a no ‘one size fits all’ plan to personal finance. It’s personal finance after all! I DO believe that there are good rules of thumb that we can go by. Tweak them here and there to suit your particular circumstances. That means altering things to benefit your financial situation, not to satisfy your spending desires!
I’ve read a lot of advice on what percentage of ones’ income should go towards various categories. Some experts vary in how they split up the categories, but for the most part, they tend to fall into these areas:
Debt-repayment (over and above what must get paid each month. Things such as a mortgage payment and paying the minimum balance on a credit card).
Vital household and living expenses.
Let’s Start with Savings
General advice tells us to aim to put 10-20% of our netincome towards savings &/or investments each month. Net pay is our ‘take-home’ pay, after tax and National Insurance gets deducted. What most experts will tell you is that your first goal is to have an emergency fund. Check out ‘Why Having an Emergency Fund Will Help You to Sleep Better‘.
Once you’ve saved/are saving your emergency fund, consider other savings:
For expenses or purchases you expect to happen in less than five years. For example, a family holiday or Christmas.
For expenses or purchases you expect to happen within five to 10 years, e.g. a new car.
For expenses expected to occur in ten years or more, such as saving up for a child’s university tuition.
You may decide that you instead want to invest long-term savings, to maximise its chance of growth. Due to not needing the money for several years, it has a better chance of weathering any fluctuations. For example, if invested in the stock market. There is always a chance of losing money in investments. If you’re not willing or able to risk this, then a savings vehicle may be a better option for you.
One final note before moving on to the next category. Some financial experts say that you should forget having anytype of savingsuntil you’re out ofdebt. This doesn’t include your mortgage. Some suggest you have a safety net of one month worth of expenses saved. Others recommend that you build your emergency fund at the same time as paying off debts.
Whatever you decide is the best option for you will depend on several things, including:
how secure you feel that your jobs are
how tolerant you are to risk
during a period of unemployment or illness, how your debts would affect you if you hadn’t reduced them
For most people, this will mean the money that they save into their pension plan. It could also include other investments such as:
investing in the stock market
buying a second property
As mentioned before, you may also want to invest money earmarked for long-term savings. It can grow more than it could in an easily accessible savings account, but there’s more risk.
Experts recommend putting 5-20% of your take-home pay into investments/retirement savings. Other experts advise beginning at half your age as a percentage.
You’re 40 and have never consistently contributed to a pension or investment. Therefore, you would invest 20% (half your age) of your income until you retire.
The younger you begin saving for retirement, the smaller the chunk taken from your budget! Yet it all depends on how much you want to live on in retirement and what your retirement goals are.
Investing is an extensive topic and you should get professional advice about. Use a regulated independent financial advisor when making such important and long-term decisions.
The advice seems to indicate that we should be putting 5%-20% of our take-home pay towards debt each month.
This percentage doesn’t include:
Your usual monthly mortgage payment (if you have one.
Paying any minimum credit card balance – you ‘have‘ to pay or risk additional debt.
Instead, this means, for example:
Making additional payments towards a mortgage if you want to pay it off earlier. Some financial gurus advocate this. Others feel that there are better things to be doing with your money.
Clearing credit card debts or paying off a car finance agreement, etc.
Vital household and living expenses
We’re advised to keep this category of spending between 50-70% of our take-home pay. Though not meant to be an exhaustive list, this category will include things such as:
This is where you finally get to have some fun with your money and use it for entertainment purposes!
From my research, advice indicates we try to keep these non-vital expenses between 10-30% of our net pay.
Again, the list below isn’t intended to be an exhaustive list. What you chose to spend your ‘fun money‘ on will be different to what I like to spend mine on, but it may include such things as:
TV subscription services.
Sports equipment, toys, and gadgets.
Beauty salon treatments.
Smoking and vaping.
Non-essential home improvements.
Junk food and takeaways.
Luxury grocery items.
Clothing (above the basics to keep from getting arrested, etc.).
Some financial specialists list the following as non-vital budget items:
mobile phones (and their tariffs). Unless it’s used for business purposes.
I hope that by reading this, you now have a clearer picture of how your spending compares.
If you’re aware of the potential impact of where you allocate your money each month, then that’s great. Whatever you decide to do is going to be very personal to you and your circumstances.
Some people don’t have the luxury of choosing where they prioritise their spending. They may have cut back everywhere possible and still don’t have enough for the basics or for saving. In these situations, it’s not a spending issue that they have, but an income issue. Until that’s improved, they shouldn’t, for example, concern themselves with investing.
Have you calculated how much of your income goes into the categories above? Are you a natural saver or spender?
What are your views on prioritising debt repayment over saving or vice versa? Do you have an emergency fund?