How to properly manage your income
Knowing how to manage your income wisely is the first step to consider once you receive your income. Knowing this will enable you to properly assign portions of your income to meet your needs and wants.
There is a popular rule of how a person must spend their income. This rule is called the 50/30/20 budget rule
Although some critics of this budget rule, the principles behind this rule can work in the favour of anyone who wants to properly manage their finances and achieve financial freedom.
With this rule, People are expected to spend 50% of their income on their needs, 30% on their wants and 20% on savings/investments.
Some people are so suggest that the amount spent on wants should be 20% and 30% must be spend on savings and investments
People suggest that if 30% of one’s income is spent on savings and investments, then that person could be the path of financial freedom and possibly an early retirement.
If we accept either of the two suggestions based on how much we spend on needs, wants, and savings/investments, then we should be able to properly categorise what our needs and wants are before we can think of any forms of savings or investments.
how to manage your income – What are our needs?
Our needs of the “necessities” of life that we cannot go without. These must include cost of a roof over our head, food, utility bills, healthcare and debt
A roof over our head in this situation where we are applying the 50/30/20 or the 50/20/30 rule must not be one that would demand all the income we receive.
Remember we are to apportion 50% of our income to cater for all our needs and not just accommodation.
The roof over our head here implies we have enough to prevent us from being homeless.
We must also be able to pay for our utilities from this.
The next thing That is considered as a necessity is food.
We all need to see you and it should be a part of the 50% set aside for our needs
We must also ensure that by using this principle we eat healthy home-cooked meals that would sustain us without any health implications.
The next thing that is considered as in need is healthcare. It is essential for people to dedicate some money towards their healthcare. This is because our health is our wealth and if we are not in good health we would not be able to make any money at all. If we also do not take care of my health and only just chase the money then we might not even be able to spend the money we make on other needs or wants.
Another important thing at this considered as a need is paying off the debt.
If you should incur any debt at a point in our lives then we must be able to pay for this money.
Paying debt must be considered as invalid because if we do not pay for a debt that would continue to rise to an extent that would be difficult for us to pay.
how to manage your income – What are our wants
Our “wants” may simply be classified as the staff and items that do not form part of the basic necessities of our life.
Examples of such wants can be close eating at a restaurant, buying gifts for people, paying for movie tickets and other forms of entertainment and even a phone.
Some people may argue that buying clothes it’s very important and it must be considered as a “need”. But we are classifying this as they want because people can always choose to buy clothes that are very affordable or very expensive.
So to apply the 50/30/20 or 50/20/30 rule we can spend a very little amount on clothes.
Clothes are also however not items but every single month for Survival. This means we can choose to buy the affordable clothes only when they are needed.
Some people may argue that the phone most falls under their necessities of life, since our lives today mostly depend on our phones.
This is absolutely true but if we are applying the rule we are working with, then we can choose to buy an inexpensive but very efficient and effective phone to save money.
For eating at a restaurant we may always choose to eat home-cooked meals which would save us a lot more money than to eat at places that would cost us much more money.
how to manage your income – Savings or investments
In the savings or investments that we do definitely involve an emergency fund, a saving fund.
The other forms of investments are totally dependent on individual preferences or choice.
An emergency fund and savings must come first before deciding to venture into any forms of investments.
Since these two would serve as your immediate financial pillar.
50/30/20 or 50/20/30 ?
This should be a personal choice. Either of the two can be chosen if a person considers one option better than the other.
One must choose whichever ratio they are most comfortable with.
But remember a good investment would lead to an early financial freedom.
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