Who said a personal budget needed to be innovative, advanced, and down right time-consuming? A Small Investment of time is more than enough to take control of your finances.
Creating a weekly, bi-weekly, or monthly budget allocation should not be a chore, but an indulgencing pleasure that leaves the creator feeling empowered and self-sufficient. This article will walk you through the Rule of Thumb for allocations and sticking to your personal budget as well as a neat story.
Guideline for Budget Allocations
In order to assist in keeping your budget on track you must allocate your money appropriately. The way I think about my monthly budget allocations is building shelter on the solid rock.
The first layer should be the foundation, and this consists of the critical components to your everyday living expenses. For example, in the foundation layer we would have tithes, housing (Rent/Mortgage, Taxes, and Utilities), transportation, and personal expenses that are not for entertainment purposes (child care, loans, and etc).
As a rule of thumb the foundation layer should be roughly 55% of your total budget. This layer will provide security that the most important payments have been allocated and paid when the bill arrives or before the due date. Next, the second layer is where we stretch our legs and live a bit.
30% of your budget should be allocated to the short-term pleasures of life. For instance, a night out with friends, eating out, and shopping should be 30% of your income or 30 cents of every dollar of your income. Now the reason this layer is sandwiched in-between layer one and three is because layer two tends to bulge and grow faster than we can track.
Therefore, layers one and three are to help keep layer two in prospective. Lastly but most certainly not least, we must take care of the person we see in the mirror. The roof top balcony view is the final layer, because you can see much further while standing on the roof top balcony than from the ground floor.
Allocating money for your future self or love ones will not only empower your financial confidence, but your future self told me to tell you that those monthly contributions to your IRA (or similar investment) is much appreciated and the future you said the beach is better this way. Therefore, 15% of your budget should be allocated to save/invest.
In other articles I go deeper in-depth with investing and saving, but for the terms of your budget allocation we should be doing one or the other. For instance, saving to build up an emergency fund or to pay off a large loan should be done before investing.
Now if you are to the point where you are able to invest I would consider investing 15% of your total income. You may be thinking that’s a fair deal of money to invest in the market on a monthly basis. However, do not forget about the rule of doubling your money and the effect compound interest can have on your investments.
Also, comparing to the 55% in layer one to the 15% in the third layer is minimal. I personally enjoy the feeling of paying my foundation layer payments first and knowing that the remainder of the money can be saved and spent for my enjoyment. Below are the layers and their percentages.
Rule of Thumb budget Allocation
Layer 3: Roof Top View = 15%
Layer 2: Live a Little = 30%
Layer 1: Foundation = 55%
Stickum Allocation
Now you have allocated and reallocated your budget to fit your personal preference…wait you have not done that yet? Take a couple of minutes literally two minutes and calculate your monthly income and complete the following steps:
- Multiple your total income by .55 then the total income by .30, followed by the total income by .15 to give you the totals you have to allocate for each layer of your budget.
- Next, take your major expenses from layer one roughly and add them up, and do the same for layer two and three.
- With the totals compare those to the allocation amounts you determined in step one. If you’re not within the allocation you will need to go back to step two and readjust
- Make sure you are within or close to the allocations layers and your done
Now that you have done the quick allocation method you have a decent idea on how you compare to this rule of thumb I’ve described. When you have a bit more time go a bit more in-depth on your actually monthly expenses, and determine what the best fit for your situation maybe.
Save More than average is better than most
The 55/30/15 method has helped guide me through various large purchases in my adult life. For instance, when considering housing; I remained steadfast with finding the right place for me that was within my 55 percent allocation and allowed additional room for the remaining expenses in that layer.
Nevertheless, I was faced with a very special life event that completely turned my allocations inside out and upside down. With the new responsibility bestowed to me I generously accepted.
If you’re faced with a similar event your budget allocations are what you make of them and only you can determine what you’re comfortable with, and what you can maintain. Therefore keep this in mind when working through your personal budget allocation.
If you have any life changing events that have changed your personal budget allocation let me know in the comments below.