It’s the age-old question. What’s the correct amount of money to spend on each of life’s essentials? If you’re someone that flippantly forks out for things without giving it much thought, you may want to start considering whether you’re maximising your salary in the best way.
Some of the wealthiest and most successful people in the world have got to where they are thanks to being sensible with their money. But no matter what your monthly earnings are, financial experts have devised a general rule of thumb that can help people manage their money so that there is never anything to worry about. By sticking to a rule about how to allocate your salary, you will start to feel a lot more at ease about your overall financial situation.
Here, we’ll take a look at the three main things you need to understand in order to become a master of your finances.
#1 – Understand the main things you spend money on
You’re probably aware of the main things that you spend money on every month, while other outgoings may pass by unnoticed. Paying for accommodation, either via rent or a mortgage, is the number one expenditure for everyone. This is an essential cost, and it’s one that few people can avoid. The same goes for food, as we all need to eat to survive.
Other necessary costs each month include utility bills, insurance, and super accounts. After all these things have been taken care of, money can then be channelled into other areas of life that could be considered luxuries. Things like eating out at restaurants, socialising, entertainment and subscriptions, buying new clothes and maintaining gym memberships are all common outgoings.
Entertainment is a huge area of expenditure, which is getting bigger thanks to the increasing number of options out there for people to choose from. A lot of people now have at least one monthly subscription to a service like Netflix or Spotify and also spend money elsewhere on mobile or console games. Finding a balance between the entertainment apps that you use is key, and it makes little sense to subscribe to them all.
Sports fans may watch pay-per-view events, and many people enjoy a punt on all sorts of games as well. In Australia, betting is a popular pastime, and there’s no shortage of apps to choose from. The best betting apps each offer something slightly different. For example, people who like live streaming might prefer Bet365, while horse racing fans go for BlueBet.
But like anything, balance is key! Spending too much on any one of these things may leave you short in other aspects of life. So, it’s important to stick within reasonable limits and live within your means at all times.
#2 – Understand how much you should be spending on each thing
There are countless books out there on money management, with financial experts espousing a vast amount of wisdom to anyone who’ll listen. One of the best-known theories about how people should budget is the 50-30-20 rule by Elizabeth Warren. In her book, All Your Worth: The Ultimate Lifetime Money Plan, Warren talks about spending 50% of your salary on things like rent, groceries, and utilities.
After that, 20% should be put into savings at the start of every month. This leaves 30% for you to spend on anything you want, such as entertainment and hobbies.
If your rent or mortgage payments are equivalent to less than 50% of your earnings, you can add more money to your savings or spend it on the things you want.
This money management template has been designed to help people handle their money correctly and avoid getting into debt. Unfortunately, some people are unsure about how their money should be allocated and then live month-to-month desperately waiting for the next payday.
One way to get a hold of your finances could be to create an Excel spreadsheet and track your spending for a few months. Work out what percentage you naturally allocate to savings, necessities, and wants, and then compare to see if you’re within the 50-30-20 rule. If this is skewed, you may need to rethink your habits.
#3 – Understand how money management impacts your life
Many people may feel like they need to take control of their finances but might not be fully committed to doing so. However, if you know the benefits that can come with clever money management, it might help you to get motivated enough to organise your spending once and for all.
Interestingly, studies have shown a link between financial disorder to and stress-related illnesses. People who worry too much about money are more likely to develop health problems, according to Linda Gallo, PhD. Therefore, making the effort to develop smart money habits and budgeting will help ensure there are never any money issues on a month-to-month basis and it may mean that you live a healthier lifestyle, too.