When it comes to financial planning, the basic recipe is always the same: separate expenses into categories, spend less than you earn and save part of your income every month. The theory is simple, but putting it into practice can be more difficult than it looks.
Even people with good financial education may have doubts to decide how much to commit income with expenses. After all, what is the ideal amount to allocate to essential expenses? And how much to save per month to form a consistent reserve?
Thinking about it, we have separated in this post valuable tips for you to set up your budget according to your earnings and your current situation. Want to know more? Check it out below!
Apply the 50-15-35 rule
The ideal way to find out how much to commit your income to expenses is to use the rule 50-15-35. Through it, it is possible to divide the monthly budget into categories and create goals for each of them.
Of course, you can make adaptations according to your needs, but it is interesting to use the method as a basis for more clarity on how to direct the use of your money.
The rule is simple: when setting up your monthly budget, your money should be divided into three groups, as follows:
- 50% for essential expenses;
- 15% for financial priorities;
- 35% for well-being.
This way, you can see how much you are spending in each category, set priorities and get organized to get out of the red and start saving. See below for more details on how to put this idea into practice.
50% for essential expenses
Half of your income should go towards your essential expenses, such as housing, education, health, transport and food.
These items represent the basic needs that everyone has to live with dignity and a minimum of comfort, so they should be the number one priority on your list.
Among the expenses that are considered essential, we can mention:
- rent;
- water, electricity, telephone and gas bills;
- bus / metro or gas tickets;
- medical insurance;
- supermarket.
15% for financial priorities
After securing the money for essential expenses, set aside 15% of your income for your financial priorities. And what are they? The answer depends on your current situation.
If you are in debt, your priority should be pay off your debts, as the accrual of interest can exacerbate the problem. Depending on the scenario, you will need to allocate more than 15% of your income to this goal, cutting expenses for the other two groups.
Assess the options you have for getting out of debt as soon as possible. If the installments do not fit the budget, consider asking for a renegotiation or even a new loan with lower interest rates, if you think it is worth it. In the worst case, selling a valuable asset, such as a car, may be the best alternative.
>> Want more tips to pay off your debts? Check out this other blog post: How to get out of debt: check out the most common types and how to pay them off <
If you are not in debt, the way is save and invest. The first step is to set up a emergency reserve with an amount equivalent to six times your monthly salary.
This is essential to cover your expenses in case of unforeseen circumstances, such as an unexpected dismissal or medical problems, without having to resort to overdraft, which is the type of credit with the highest interest rates on the market.
After building the reserve, the goal is to invest your savings in a diversified investment portfolioin order to multiply your assets.
35% for well-being
With essential expenses in order and financial priorities guaranteed, the remaining 35% is available for you to spend as you wish. Here are included all expenses considered non-essential, that is, the first expenses that must be cut at the time of squeeze.
However, this does not mean that they are not important. Everyone needs to invest in their own well-being in order to have a satisfying life. What's the use of having money and not spending it on what brings you happiness? Some examples of expenses that fit this 35% are:
- Bars and restaurants;
- ballads and shows;
- gym;
- beauty salon;
- travels;
- cable tv / platforms streaming;
- shopping at the mall.
For many people, the big challenge is to understand that these expenses must come later essential expenditures and debts / investments. That way, you are free to do whatever you want without any guilt.
Limiting these expenses to 35% of your income also helps to combat two major enemies of financial health: impulse purchases and unnecessary expenses. With a certain amount to spend on your well-being, you will only make purchases that will really make you feel fulfilled.
Save as much as you can
In practice, the reality is that there is no exact formula to find out how much to commit from income to expenses. As stated earlier, rule 50-15-35 is not immutable, and must be adapted according to your reality.
For many people, it is difficult to save 15% of what they earn, while other people could easily save a higher percentage. In any case, if you are able to allocate a larger amount for this purpose, do so. Your future is grateful.
However, if your household budget is consuming more than 85% of your income, you will need to make some adjustments.
An alternative is to look for ways to increase your earnings, looking for sources of extra income or changing jobs. In this way, you can maintain the standard of living by making a little more money, which should be used for your applications.
Another option is reduce spending a little bit with leisure and, if possible, with basic expenses, freeing up part of the budget in order to save more.
Whatever your decision, keep in mind that improving your ability to save is a crucial step in the quest for the long-awaited financial independence.
Be careful when cutting expenses
Although saving is essential when deciding how much to commit to income with expenses, this must be done with balance.
Never stop paying debts, cut indispensable expenses or sacrifice your well-being to save money. Emergency and heritage reserves are objectives that take time to take shape, so don't be in a hurry and prioritize a healthy relationship with money in your day to day.
Remember that spending cuts are limited, but opportunities to increase income are endless. So, if you really need to speed up the process, think of ways to get extra income instead of letting go of your needs.
Make an annual plan
When assessing how much to commit to income with expenses, remember that not every month your earnings and expenses will be the same.
In January, for example, we have the taxes at the beginning of the year, as IPVA and IPTU. If you have children, there is also the school enrollment and school supplies, which is becoming more and more expensive. Not to mention the car insurance, gifts on holidays, trips and other expenses outside the day to day.
On the other hand, there are months when our gains are greater, with 13th salary, ⅓ of vacation, IR refund, bonuses, profit sharing and commissions.
Therefore, in addition to the month-to-month budget, the ideal is also to make an annual plan, scheduling yourself to deal with each of these extra gains and expenses. This way you avoid being caught off guard and gain even more control over your financial life.
Now that you have learned to define how much to commit your income to expenses, how about putting what you have learned into practice? Use the 50-35-15 rule as a basis, put your budget in order and start investing your savings to build equity. If you do, financial independence will only be a matter of time!
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