Guidelines to help spend your income wisely

Guidelines to help spend your income wisely

Elizabeth Warren's budgeting rules of thumb are popular, but Liam believes a more nuanced approach works better

Following on from last week, I’m going to give you some guidelines for what I believe are some good numbers to follow when assessing how much you are, and should be, spending on different categories each month.

No two budgets will be the same, given the different circumstances of people’s lives - age, income, whether they have children etc - but regardless, it’s important to start somewhere.

One popular budgeting rule of thumb is referred to as the 50/30/20 rule, coined by Elizabeth Warren in her book, The Ultimate Lifetime Money Plan, where she suggests that no more than 50% of your net income should be spent on ‘needs’ like, groceries, mortgage, transport costs, health and car insurance.

Some 30% should be apportioned under the category of ‘wants’; an example of these are, lunches, travel, entertainment etc. Finally 20% should go to savings and debt repayments.

I have a couple of issues with this method; the first that it is too broad and doesn’t individualise your spending. I think your spending needs to be more exact than that. For example, I spoke with a someone who read lasts week’s article and he said he couldn’t believe how much he spent on orange juice.

He earns about €50,000 per year so surely €2 per day is insignificant on that salary? His immediate thoughts would be, ‘nothing to see here, move on to something that cost more’.

But when you look at the numbers a bit closer, it told a different story.

After taxes, his salary became €36,500 and after his mortgage was paid for, he was left with €20,900. There are about 250 working days in the year, so his OJ was costing him €500 a year. That meant 2% of his net income, before he saved anything, was going on one drink every day. He didn’t like orange juice that much, it was just habit purchase he made on the way to work each morning, so he resolved to do something about it.

The 50/30/20 rule I don’t think would have been able to identify this for him as it would have been consumed under one heading. My second issue with it is: when does a need become a want? We need clothing up to a point, but after that, surely, it’s just a want. Anyway, below are my guidelines on how much of your salary should be spent on different areas.

Home expenses: This will be influenced by the area you want to live in and the purchase price. But, my rule of thumb is based upon the rule of 28/36. What this means, is that your mortgage repayment should not exceed 28% of your net monthly income, or if you have other debts, when combined along with your mortgage repayment, does not exceed 36% of your gross monthly income.

Utilities: The acceptable percentage in this category, I believe, is between 5% an 8%.

Food, drinks and shopping: Between 15% and 25% is acceptable and this outlay includes, groceries, meals out, meals at work, drinking at weekends, lunches and coffees.

Insurances: Never the most fun expense in anyone’s budget, but I would recommend, they shouldn’t account for more than 5% of your monthly expenditure.

Finance and credit repayments: If your number is greater than 10%, you have too much debt, in my opinion. People with debt to income ratios greater than 10% are more likely to have trouble making repayments on time and will suffer more if exposed to income shock.

Car and travel: Fuel, toll charges, car maintenance etc. all add up. So, this category will vary depending on where you live, whether you have a long commute to and from work, or if you have access to good public transportation. Anything under 10% of your monthly budget in this category would be recommended and considered acceptable.

Fun and entertainment: The recommended, and acceptable percentage in this category would be between 5% and 10%.

Health, beauty and fitness: I would recommend allocating between 3% and 5% of your monthly budget to this category.

Included in this percentage is an amount allocated to fitness. Setting aside funds each month that are used towards becoming and remaining physically well is very important. Your health is your wealth and looking after your mental and physical wellbeing is important. My recommended percentage here is 2%.

Clothes: The amount I recommend you should be spending in this category is not more than 5%. Studies show that guideline is helpful for reeling in the danger of over shopping or spending sprees.

Education and personal development: You are your biggest asset when it comes to what income you earn each year. Your house, cars, investments etc. wouldn’t exist without you, your career and the income you earn each year, so setting aside 3% of your income each month is a good number to invest in yourself.

Savings: The amount you should be saving each month, is as much as you can! Because everyone earns a different amount each month, they all have different circumstances and obligations as well. So, saving a particular percentage is not going to work for everyone. If you were to pick a number though, you should aim towards 10% of your net monthly income.

Large once off expenses: The largest outlay in this category is the amount spent on holidays. Family holidays can be budget busters if you overspend. Having time with your family is important, but the amount I recommend you set aside and budget for family holidays is between 5% and 10% of annual gross income.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at or

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