That old chestnut: how much should I be spending on each of life’s essentials? If you’re prone to splurging on things without a second thought, it won’t take long until your bank account is looking a lot less juicy than it once was. The answer? Learning to be a little more sensible with your finances.
It might sound boring, or even blatantly obvious. But the fact remains that many of the world’s wealthiest and most successful people got to live in the pointy end of life thanks to developing a sensibility with their money.
No matter what your monthly earnings are, whether you’re Elon or just another one of the 99%, there’s a general rule of thumb you can follow to help you manage your money so you’ve never got a thing to worry about.
By sticking to a rule about how to divvy up your earnings, you’ll start to see that bank account balance bounce back and feel more at ease about your financial situation.
Keep reading to learn the 3 key things everyone needs to understand to master their finances.
#1 – Know what you *actually* spend money on
You probably think you are well aware of the things you spend money on every month, but truth be told, there’s probably a mountain of other smaller outgoings that slip through under the radar.
Sure, paying for your housing, either via rent or a home loan, is the biggest cost for everyone. This is an essential, and few of us can avoid it. The same goes for food, as we all need to eat to survive.
Other essential costs each month include gas and electricity bills, insurance, internet and phone, and expenditures for cars and things like school fees.
The first step is to add up your actual monthly fixed costs. After your fixed costs have been squared away, you can then spend on other things that may be thought of as luxuries.
If you’re looking to really get a handle on your finances, then you need to be honest about what is really an essential and what is a luxury. Whilst things like eating out/deliveries, catching up with friends, entertainment and subscriptions, updating your wardrobe and gym memberships are all common outgoings, truth be told they’re more of a luxury than an essential.
The same goes for entertainment at home. These days, entertainment is growing area of expenditure for most people. It’s common to have a monthly subscription to a range of platforms like Netflix, YouTube, Spotify as well as numerous apps.
Sports fanatics may find themselves paying hundreds of dollars a year to watch pay-per-view events, and many people enjoy a gamble every now and again as well.
As with everything in life, balance is key! When you take a look at what you are really spending your money on each month you’ll start to see whether you’re over indulging on any of these luxuries which may leave you short in the savings department.
#2 – Know how much you *should* be spending
There is a plethora of content available on money management, with financial commentators touting their ideas about getting rich or living frugally to anyone who’ll listen.
However, one of the best-known theories about we should budget is the 50-30-20 rule by Elizabeth Warren. In her book, All Your Worth: The Ultimate Lifetime Money Plan, Warren explains the magic formula for how to divvy up your earnings.
She recommends allocating 50% of your earnings on big ticket, essentials such as rent, groceries, and utilities. Then, 20% should be put into savings at the beginning of the month. This leaves 30% to spend on whatever your heart desires.
However, if your big ticket costs happen to be less than 50% of your earnings, she recommends adding extra money to your savings (or you can spend it on whatever you want.)
Because some people do not know how their money should be allocated, they live month-to-month waiting for the next payday. Elizabeth Warren’s money management template has been designed to help people handle their money correctly and avoid getting into debt.
If you’re wondering how you can keep track of it all, there are several free apps available that can help you track your spending. You can also create an Excel spreadsheet and track your spending that way for a few months.
Calculate what percentage you’re already allocating to necessities, saving and luxuries, and then compare to see if you’re within the 50-30-20 rule. If you’re out of the zone, you may want to rethink your habits.
#3 – Learn how money management impacts your life
Like a New Year’s resolution, many of us have the idea that we need to take control of our finances but we’re not really committed to seeing it through.
However, if you understand the benefits that the right money management can bring, you’ll be far more likely to stay motivated enough to organise your spending once and for all.
And remember, it’s not just the health of your bank balance that matters. Studies have demonstrated a link between financial disorder and stress-related illnesses. People who worry too much about money are more likely to develop health problems, according to Linda Gallo, PhD.
Therefore, if you make the effort to develop better money habits the impacts are two-fold: it’ll reduce the likelihood of those dreaded monthly money dramas and it may even mean that your body and mind is a lot healthier too.
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