Being creatures of habit, we need to follow a certain set of rules and routines in order to get through our days. These habits range from the time we wake up and go to sleep, what we do immediately we wake up and right before we go to sleep, what time we take our meals, what route we use to go to work e.tc. In the greater scheme of thing, if it isn’t for such routines, we would invite a world of chaos.
Budgeting is one such habit that we should also invite into our lives. It can put us in a box and fix us into a rigid lifestyle, but the opposite is much worse. Lack of budgeting leads to the realization that the goals we wanted to achieve in let’s say 5, 10 years’ time, is much further than we would like. And trust me, this is just the best scenario, a much worse scenario could play out and we should not be caught off guard if we have the tools at our disposal.
Budgeting comes in a myriad of ways, however, there is one rule, the rule of thumb that is undeniable better than the rest. This is mainly due to its practicality in application for people of all income levels. The chart below highlights the rule;
Needs – This should ideally be what you cannot live without. Your basic needs. Housing, Utilities, Food, Clothing, Health Insurance and all living essentials. This should be allocated 50% of your after tax income
Wants – This is ideally basic life necessities that you enjoy. Not extravagant items! Netflix subscriptions, dining out, and hobbies. This should be allocated 30% of your after tax income
Savings – This is basically self-explanatory. This should be allocated to that retirement fund, education fund, safety net fund etc.
NB: A little Bromide tweak to the above rule is the allocation of debt repayments. A lot of advisors place debt repayments on the savings quadrant, we believe this should be shared 50/50 between the wants quadrant and the savings quadrant.
With the above rule, budgeting not only becomes a habitual practice, but a part of your essence. Try it and wait for the results!
To access our resource on budgeting, visit out resources page here.
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