If you’re looking to prevent overspending, you will need to develop a method that fits your budget. One common method involves tracking all expenditures during the month and adjusting them to ensure that expenses never exceed income. This may work for some, but others want something more concrete and ambitious. So what percentage of your earnings should you save each month?
Unfortunately, there is no perfect, one-size-fits-all number, but 40% provides a good starting point. Make sure to plan according to what you can afford to set aside; your number might need to be different. If you hit your perfect percentage, you won’t have to count every penny, and you’ll have plenty of extra cash at the end of the day.
The Key to Putting Money Aside
Contrary to common belief, it rarely matters where you’re overspending. After all, it’s all debt. But, it is important to understand your committedâ”or fixedâ”spending so you can be ready for unforeseen expenses. Big, irregular expenses can drain the remainder of your emergency cash reserves. If you set aside 40% percent of your total earnings, you may be able avoid flat-lining your accounts when you take a vacation or fix the roof.
How you handle committed expenses often determines whether or not you’ll hit your 40% savings goal. Try not to spend any more than 60% of your income on fixed expenses. Many things fall into this category, including food, clothing, essential household expenses, insurance, bills, and taxes.
Your Allocation Scheme
Once you have figured out how to budget your way to 40%, you’ll need to put that extra money in the right places. Here’s one way to divvy it up:
Long-Term Savings Goals: Make deliberate steps to create a long-term savings goal. A certain percentage of the 40% should go into your retirement account. Aim high and scale it back if needed. Start with 10% to be safe. Drawing money from this bucket should be your last resort.
Irregular Expenses: This is the big one. You will need to set aside 20% for vacations, repairs, appliances, gifts and other irregular and unpredictable expenses.
Entertainment Expenses: Everyone needs to live a little. Set aside 10% for fun. This includes weekend trips, amusement parks, movies, bars, restaurants, and whatever else you’re into.
Make Your Mark
As you probably know, there’s no perfect percentage for the masses. You’ll need to test the waters and figure it out for yourself. But, if you start at 40%, you’ll probably find your mark rather quickly.
By saving regularly, you’ll put yourself in a better position to meet future financial challenges head on. Of course, it’s not all about helping yourself. When you set a goal now, you can make your mark on your children’s lives, too. Be sure to set realistic expectations, and always maintain a lifestyle that fits your budget. The Jones’s aren’t that cool, anyway.
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