How do I allocate my money?

Welcome to my guide on mastering the art of money allocation! This will ensure proper budgeting and financial stability in your life. As we navigate the labyrinth of personal finance, it's crucial to have a clear roadmap on where our hard-earned money should go. Let's dive into some general rules and principles that can guide us towards making wise financial decisions.

Rule 1: The 50/30/20 Rule

One of the most popular budgeting rules is the 50/30/20 rule, which suggests dividing your after-tax income into three main categories:

• 50% for Needs : This covers essentials like rent, groceries, utilities, and healthcare.

• 20-25% for Savings and Debt Repayment : Prioritize building an emergency fund and paying off debt to secure your financial future.

• 25-30% for Wants : Allocate this last portion for non-essential items like dining out, entertainment, and shopping.

Let's take a look at an example:

Bob has a net income of $90,000. He enjoys going out to eat, going to the movies regularly and buy clothes. He decides to only put away 20% of his yearly income.

John also has a net income of $90,000 . But unlike Bob, he enjoys staying home to eat and saving his money since he wants to have a luxurious retirement. To achieve this, he puts away 30% of his yearly income.

In 20 years, if they both decide to put their savings into identical savings how would their savings compare?

At a standard return of 5% a year from the market;

Bob's total initial investment of $360,000 would have grown to approximately $595,187.

John's total initial investment of $540,000 would have grown to approximately $892,781.

What does this mean? Spending 10% less of his income over the course of 20 years allowed John to have an extra almost $300,000 compared to Bob! When looking at the difference in initial investment of $180,000 , John practically made $120,000 doing nothing! This is the power of budget allocation over time.

Rule 2: Pay Yourself First

Consider automating your savings by setting up direct deposits to your savings account at the beginning of each month. By paying yourself first, you ensure that your long-term goals are being funded before other expenses eat into your budget.

Rule 3: Emergency Fund

Building an emergency fund is a crucial component of financial planning. Aim to set aside at least three to six months' worth of living expenses to safeguard against unforeseen circumstances such as job loss or unexpected medical bills.

Rule 4: Track Your Spending

Budgeting is only effective if you track your expenses. Use apps, spreadsheets, or old-fashioned pen and paper monthly to monitor where your money is going. This awareness will help you identify areas where you can cut back and reallocate funds more efficiently.

Rule 5: Prioritize High-Interest Debt

If you have outstanding debt, prioritize paying off high-interest loans or credit card balances to minimize the interest accrued. By tackling high-interest debt first, you free up more money in the long run to invest or save for other financial goals.

Wrapping Up

Mastering the art of money allocation requires discipline, dedication, and a clear understanding of your financial priorities. By following these general rules and incorporating them into your budgeting routine, you can pave the way towards financial freedom and security.

Now, armed with these principles, you can confidently take charge of your finances and set yourself on a path towards a prosperous financial future. Cheers to smart money management!