The short answer: whatever’s left over.
One must begin with the mentality that certain expenses are non-negotiable. Regardless of whether one is a person of faith, 10% should be set aside for the purpose of giving to charity. Being more charitable opens one’s spirit and helps them focus on others, not just themselves.
The next non-negotiable is to focus on eliminating all non-home debt by severely limiting discretionary spending. In this scenario, one must make it a point of emphasis to purposely not spend money so a maximum amount can be allocated towards paying off one’s debts. Making payments each month already limits what can be spent so the idea is to eliminate the debt so the money previously allocated towards monthly payments can be used to build wealth and enjoy a more comfortable life.
Don’t forget about emergencies.
Once all non-home debt is paid off, the next focus is to build an emergency fund of somewhere between 3 to 6 months worth of expense. Following that, one should allocate at least 15% for retirement planning. Additionally, if there are children, money should be set aside for college. A good recommendation is $2,000 per child per year. More should be considered if they are teenagers. Notice retirement planning is higher on the list and should be done before saving for college. Additionally, funds should be set aside for home and car maintenance each month. This money is saved for when repairs are needed and are above and beyond the emergency fund.
Here’s the Bottom Line
Considering where one is will dictate their priorities. At each stage, what should be allocated for spending is, therefore, whatever is left over. By taking care of the non-negotiable items first, one has no choice but to live on the rest. Unfortunately, most people do the opposite. They put the most important things at the bottom, hope they can make it happen, and then settle when it doesn’t. By living on whatever is left over, one changes their mindset from being a consumer to being a wealth builder. Finally, it is important to note that using percentages as a recommendation on how much to spend is inefficient as it doesn’t take into consideration one’s income level nor does this approach lend itself to the mentality of taking care of priorities.
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