monthly expenses percentage of income

Blog TLDR

We’re talking about how there is a clear cut differentiation between needs and wants when it comes to monthly expenses allocation from your income. The easiest and simplest method is the 50 30 20 budget rule.

Introduction

With so many needs, debts, and wants competing for your wallet, it’s easy for you to get lost in overspending and being buried in more debt. You even have to allocate money for savings, emergencies, loans, and debt repayment. What you need is not a list of “things to buy” and “things to buy later.” You need a budget with a fixed allocation percentage that follows the 50-30-20 rule (needs for 50, wants for 30, savings for 20).

Check your paycheck first (50 30 20 budget calculator)

50 30 20 budget calculator

Before you begin assigning budget allotments, you need to know how much money you have at hand every month. Using your base salary as your working budget would be wrong. You have to factor in the federal income tax, provincial or territorial tax, CPP, insurance premiums, Social Security, and medicare, all of which are deductible from your salary. Self-employed individuals would also have to subtract from their gross earnings their business expenses, on top of their taxes, insurance premiums, and Social Security payments.

Deduct fixed expenses and regular debt repayments (needs vs wants list)

If you have a mortgage or car loan you need to pay within a specified period, you need to deduct that from your gross income as well. For example, you might be paying for a house worth CAN$400,000 payable in ten years. Ten years is equal to 120 months, which means you need to allocate CAN$3,400 per month from your income to pay for your house (assuming no interest payment).

If your monthly gross income is CAN$9,000 dollars (Canadian minimum wage rate), you would have to allot CAN$3,400 from it, leaving you only CAN$5,600. Remove the other deductibles such as the CPP, taxes, and insurance, and the remaining money is the working budget you’ll have every month. If you are renting, you would also have to deduct that from your gross income.

needs vs wants list

Allot 50% of your working budget to your needs

Suppose you have a remaining CAN$3,000 per month from your gross income after deducting all that needs to be deducted. Following this rule, your monthly budget for your needs should be CAN$1,500. If for example, you are a minimum-wage earner who has a family of five to feed, you have no choice but to restrict yourself to this amount every month, especially if you’re on a mortgage.

Impose fiscal discipline by sticking to food rationing, sending your children to public school, wearing old clothes, and conserving on heating expenses. This might seem impossible, but with a will and gut made of steel, you can succeed, especially since you are a member of the middle class and not some minimum wage earner.

Maximum of 30% of your budget can go to wants (needs and wants)

Read this phrase slowly and think about it for a moment: “working for a living.” Living isn’t the same as surviving for someone who’s in the middle class. You want to have a brand new car, beautiful shoes, an engagement ring for your fiancee, or a piece of glazed doughnut from your local pastry shop. These things, while you want them, are not essential to living, yet these wants give meaning to “living” and separates it from “surviving.”

Nevertheless, it bears repeating to say that you have to live within your means. Following the CAN$3,000 working budget example, that 30% allotment would translate to CAN$900 per month. If you choose not to spend this allotment at all, that 30% can go to savings or additional needs your 50% can’t provide.

needs and wants

However, if you have debts that would eat up your entire gross income if you paid for them in full, you would have to reduce your wants allocation to as much as 5% to pay them up slowly over time.

20% of your working budget must go to savings (monthly expenses percentage of income)

With so little money you earn, and the prices of so many needs have skyrocketed, it might be tempting not to consider saving at all. However, nobody can tell when emergencies such as sudden illnesses, deaths, or disasters could happen. It would be unfortunate if you have no cent to turn to when you have these emergencies.

Thus, as a rule, you must set aside at least 20% of your working budget for your bank savings account. However, if you have urgent debts that need to be paid, you might have no choice but to slash those monthly savings to 5% as well. What’s important is that savings should never be zero, and your debts are fully settled as soon as possible.

This is why financial wellness & literacy is crucial to the success of your business & employees, get in touch today to see how we can help.

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