How to Budget your Income
Making money is one problem, spending it is a bigger problem. Everyone can make money but how one spends the money is where the difference lies. Different people prioritize different things to spend on. Nonetheless, the importance of budgeting cannot be overstated. At any given time you might not have enough money to cater for all of your needs. As such, meeting some needs will have to be postponed or these needs done away with completely. As long as you are aiming for financial freedom, you must cut unnecessary costs and live way below your means, hence the famous 40–40–20 formula.
The above formula is a savvy division of your total earnings and a good point to start from for people looking for financial freedom. The first 40 represents 40% of your total earnings, which should be channelled to utility bills(rent, shopping etc.). As such, you must cut back on unnecessary spending, and make sure you don’t spend more than 40% of your net earnings on utilities. For instance; a person earning 40k monthly can comfortably use 16k for bills(do the math!).
The next 40% should be channelled to long term investments, which will help generate passive income a couple of years from now. These investments include assets such as shares/stocks, government bonds and T-Bills, Real-estate, money-market funds(MMFs), etc. Remember these are long term investments; therefore, they call for patience. A piece of land will not appreciate abundantly in a year, but give it some more years and you will be smiling. This also applies to shares, bonds & T-bills and/or any other asset.
The last 20% can be held for savings and emergency funds. One thing you need to try as much as possible is to have an emergency kit. This will cushion you in cases of emergencies, protecting you from ending up in debts. For instance, you will not sell your shares/assets just to repair broken or faulty electronics. If you will not have some funds in your emergency kit you will end up borrowing so that you can cater for it. Notably, the ideal here is not just to save and invest, but to save, invest and live decent, debt-free as well. In the same vein, it is unwise to borrow money so that you can invest — you must understand that debts are short term but investments are long term and your investments might take a while before breaking even.
The 20% emergency funds portion can be split, some going as savings in form of cash(bank account); while some other portion can be used to pay an insurance cover. Insurance covers are perfect risk management tools and will save you from a lot of stress in the event of ailments, accidents, calamities etc. However, the above formula only works for the disciplined people in terms of their spending as you will have to forgo a lot of luxury to cope with it. The pain of such sacrifice will be felt in the present but the joy it will bring in future will surpass the current suffering. This could be the best decision you might have ever made!
