How to spend your Money Wisely- Budgeting Ratios
The 20-30-50 – Budgeting Ratio
A lot of life's lessons are tied in ratios. Learn what money ratios and rules of thumb you need to keep in mind to stay on top of your money. The budgeting ratio says (the order is important):
20% is allocated to Tithing and Savings. 10% Tithe, 10% should be used to pay yourself. meaning it should be immediately saved (for goals or retirement) or put towards paying down debt.
30% should be the maximum you spend on housing.
50% should be spent on everything else.
If your take-home pay is R 5 000 a month, you should aim to:
Spend at least R 1 000 towards your retirement accounts, emergency fund, or your debts.
Spend no more than R 1 500 a month in rent or a mortgage.
Spend no more than R 2 500 for everything else.
Why does this ratio work? This ratio is valuable because it gives you a healthy and achievable target for savings and housing. If you are saving 10-20% of your income, you're ahead of most people and are setting yourself up for financial success down the road. Average retirement savings is dangerously low. Thirty percent (30%) on housing creates a good anchor for how much you should pay, stick with it and you are able to spend more elsewhere.
Can you spend 31% on housing? Sure, you can do whatever you want. But that 1% comes at a cost to something else, hopefully, that 50% and not the 20%.
If you do get a big boost in income, try to invest the increased income rather than lift all the percentages up.
6 times your Monthly Expenses – Emergency Fund Ratio
How much should you have in your emergency fund? Experts say at least six months of expenses.
Some people believe you need 12 months, others say 3, others 6 months; I say start with saving up R 1 000. Get yourself to R 10 000 in emergency fund savings as your interim goal, that’ll be ten months of R 1 000 per month, then continue until you get to your ratio amount. Figure out what you'll do once you hit six months income in your emergency fund. Maybe you just leave it be. Either way, you won't go wrong having six months of income.
Why does this ratio work? A Six month fund is a good target and gets you on the path of saving. The biggest and most likely emergency is job loss and six months will give you ample time to start cutting expenses back while you look for a new one. If you want to be more conservative, make it a 12 month emergency fund.