Several blog articles were published recently about expense distribution formula between wants and needs. I personally recommend Balanced Money Formula from getrichslowly, advocating this simple rule:
- Needs - 50%
- Wants - 30%
- Savings - 20%.
I will elaborate here about my view on expense allocation to the above three bulk expense categories. In Budget Planning Tool article I suggest a budget tracking Excel template that supports allocation and tracking by these categories.
The following expenses belong to this category:
- Housing expenses (with one exception: mortgage core down-payment, which belongs to savings; roughly calculated as 'loan amount' divided by
' downpayment months')
- Cell phones, TV, Internet
- Basic clothes and groceries
- Basic health care (excluding gym)
- Insurance (inclusive payments deducted from salary, or paid by your employer)
- Emergency fund (see this article from getrichslowly for more details; deposit 5% of monthly expenses, no matter how much you already have on this fund; this fund is only for one-time emergency payments, as its name suggests; if the amount exceeds 3 monthly expense amounts, transfer excessive amount to Wants or Savings)
- Basic (compulsory) education and nursing expenses
- Bank fees and interest
- Any down-payments on the above items
- Any savings targeting items in this category (e.g., savings targeting next car belong here, and not to Savings category)
- Benefits net value related to this category (for example: car net value would be total equivalent spending on private car, inclusive next car saving fund; meals net value would be your alternative spending on the meals, etc.).
The following expenses belong here:
- Home improvement
- Luxury clothes
- Luxury meals (restaurants, etc.)
- Entertainment and hobbies
- Luxury sports (inclusive gym) and beauty care
- Donations and presents
- Education (exclusive basic expenses)
- Any down payments on the above items
- Savings targeting the above items (e.g., vacation fund)
- Benefits net value (e.g., gym / vacation paid by employer)
Finally, this category includes:
- Mortgage core down-payments
- Pension fund deposits (inclusive both deduction from salary and employer share)
- Regular saving / investment deposits (inclusive deductions from salary and employer share) not intended for spending until you stop working
- Debt repayment (not inclusive down-payments on Wants and Needs).
Your comments are welcomed!