Are you confused by all of the financial advice out there, telling you how much you need to be saving each month? I know that I used to be!
Maybe you’re in a spin about what percentage of your income you should be investing into a pension, so that you’re not eating cold baked beans in your old age? (Unless that’s how you roll).
Do you ever wonder if you’re spending far too much of your income on things you enjoy, but that may be costing you more than the actual price tag, in terms of your financial health?
Are you stressed because you can’t possibly save what (insert financial guru’s name) recommends you save each month because right now you’re struggling to afford the basic requirements of living? (I know I’ve been there) Well, please read on, friend…
Let me first say that I truly don’t believe there is a ‘one size fits all’ plan to personal finance. It’s personal finance after all! I do, however, believe that there are good rules of thumb that we can go by and tweak here and there to suit our particular circumstances. When I say ‘tweak’, though, I mean altering things to benefit our financial situations and not simply to satisfy our spending desires.
I’ve read a lot of advice on what percentage of ones’ income should be put towards various categories, and some financial experts split up the categories slightly differently, but for the most part, they tend to fall into the following areas:
- Saving and Investing (there’s a difference and you can find out more here.).
- Debt-repayment (over and above what must be paid each month, such as a mortgage payment and paying the minimum balance on a credit card).
- Vital household and living expenses.
- Recreational/discretionary spending.
Let’s start with savings…
The general advice seems to be that we should aim to put 10-20% of our net (‘take-home’ pay, after tax and National Insurance has been taken out) income towards savings &/or investments each month.
What almost all experts will also tell you is that before you make any other saving goals, you must first be working towards building an emergency fund (also known as ‘rainy day’ fund). Check out ‘Why Having an Emergency Fund Will Help You to Sleep Better‘.
Once you’ve got your emergency fund saved (or while you’re still saving for it) you might want to consider other savings.
Firstly, there are Short-Term Savings – These are for expenses or purchases you expect to happen in less than five years, for example, a family holiday or Christmas.
Medium-Term Savings – For expenses or purchases you expect to happen within five to 10 years, e.g. a new car.
Longer-term Savings – For expenses expected to occur in ten years or more, such as saving up for a child’s university tuition.
You may decide that you instead want to invest long-term savings, to maximise it’s chance of growth. Due to the fact that the money won’t be needed for several years, it has a better chance of weathering any fluctuations of, for example, the stock market. However, if you’re not willing or able to risk the fact that you may end up with less money when it comes time to withdraw it, then a savings vehicle may be a better option for you.
Have you ever heard of ‘sinking funds‘?
These are basically mini-savings goals that are designated for specific purposes.
You may decide to use separate bank accounts for each sinking fund, you may keep the money in jars at home (probably not the safest idea for anything other than small sums of money), or you may just want to lump all of your savings together in one place, keeping track of what money belongs to what fund/purpose on a spreadsheet or in a notebook. Our sinking funds have saved our skin and our budget many a time!
One final note before moving on to the next category is that some financial experts say that you should forget having any type of savings, even that of having an emergency fund, until you’re out of (non-mortgage) debt.
Some people suggest that you have at least a minimal safety net of one month worth of expenses saved while you’re getting your debts under control. Others recommend that you save money towards building your emergency fund at the same time as paying off debts.
Whatever you decide the best option is for you and your family will really depend on several things, including how secure you feel that your jobs are, how tolerant you are to risk and, if during a period of unemployment or prolonged illness, how badly you’d be impacted by your debts if you hadn’t prioritised them above savings.
For most people, this will mean the money that they save into their pension plan, but it could also include other investments such as investing directly into the stock market or buying a second property.
As mentioned before, you may also want to invest money earmarked for long-term savings goals (more than 10 years), in the hope that it’ll grow more than it could in an easily accessible savings account.
Experts recommend putting 5-20% of your take-home pay into investments/retirement savings, though other experts advise using half your age as a percentage for how much you put into retirement investments.
For example, if you haven’t consistently contributed to a pension or investment by the age of 40, you’d, therefore, invest 20% (half your age) of your income until you retire. It just goes to show that the younger you begin saving for your retirement, the smaller the chunk taken away from your monthly budget! It all depends on how much you want to live on in retirement and what your retirement goals are.
Investing is an extensive topic and something that people should get professional advice about from a regulated independent financial advisor when making such important and long-term decisions.
The advice seems to indicate that we should be putting 5%-20% of our take-home pay towards debt each month.
This percentage doesn’t include your usual monthly mortgage payment (if you have one) or paying any minimum credit card balance, as they ‘have‘ to be paid or you risk additional debt and possibly losing your home. No, what this means is, for example, making additional payments towards a mortgage if you want to pay it off earlier (some financial gurus advocate this and others feel that there are better things to be doing with your money) and clearing credit card debts or paying off a car finance agreement, etc.
Vital Household and Living Expenses
We’re advised to keep this category of spending between 50-70% of our take-home pay. Though not meant to be an exhaustive list, this category will include things such as:
- Food & household groceries (the basics).
- Mortgage or rent payment.
- Council tax.
- Gas, electricity, and water.
- Fuel/public transport to get to and from work.
- Clothing basics.
- Life assurance.
- Home (building &/or contents) insurance.
- Car tax, new tyres, car insurance, and M.O.T.
- Sight tests and glasses.
- Boiler servicing.
- Necessary hair-cuts.
This is where you finally get to have some fun with your money and use it for entertainment purposes!
From all of the research I’ve done, the advice seems to tell us to try to keep these non-vital expenses between 10-30% of our net pay.
Again, the list below isn’t intended to be an exhaustive list, as what you chose to spend your ‘fun money‘ on may vary greatly to what I like to spend my money on, but it may include such things as:
- TV subscription services.
- Sports equipment, toys, and gadgets.
- Beauty salon treatments.
- Restaurants/eating out.
- Smoking and vaping.
- Days out.
- Non-essential home improvements.
- Junk food and takeaways.
- Luxury grocery items.
- Clothing (that isn’t just the basics to keep you from being arrested or dying from hypothermia/heat-stroke).
…and unless it’s used for business purposes, some financial specialists would also include having home internet, landline telephones, mobile phones (and their tariffs) as non-vital budget items.
I hope that by seeing what the experts recommend, you now have a clearer picture of how your spending compares.
As long as you’re aware of the potential impact of where you allocate your money each month, whatever you decide to do is going to be very personal to you and your circumstances.
Some people don’t have the luxury of choosing where they prioritise their spending. They may have cut back everywhere possible and either still don’t have enough for the basics each month or don’t have enough to save. In these situations, it’s not a spending issue that they have, but an income issue and until that’s improved, they shouldn’t, for example, concern themselves with investing.
Have you calculated how much of your income goes into the categories above? Are you a natural saver or spender? What are your views on prioritising debt repayment over saving or vice versa? Do you have an emergency fund?