Through the traditional methods of wealth building, your main source of income will likely be from the wages from your job. This is important as it is a starting point for creating a budget and how much you can plan to spend on each category.
The below spending does not include the automatic contributions we make from our paychecks such as 401K, Health Savings Account, and the 529 Plan that we do in addition.
Housing, 25%
Experts typically recommend spending 25-30% of take-home pay on your primary home-related expenses. I have heard 25% of Gross but I like to stick to the conservative side and use take-home pay in order to better budget on the amount you actually see on hand each month. We have luckily been able to meet just about that amount at 27% of our total take-home pay (Mortgage + Utilities).
Investment Property, 20%
The next largest piece in our spending category is our Investment Properties. We use this portion of the fund to pay off the mortgages so that we can generate free cash flow for passive income. We currently own two properties with mortgages, but the more you own and have paid off, the larger passive income you'll generate (read: How to Buy an Investment Property every 3 Years).
Savings, 19%
We try to save roughly 20% of our funds in cash each month. The savings are essential to invest in opportunities that may emerge at any given time.
The amount of savings is not always consistent if we overspend on our budget. During the winter months, it can be easier to save more as we do not go out as much; nonetheless, cash savings can fluctuate from month to month.
Tip: an unbudgeted source of cash like bonuses can help offset the expenses that you have not budgeted. For example, each March when we receive our annual bonuses, we make large purchases like new phones, future travel bookings, or additional payments to our mortgages.
Stock Investment, 10%
The next largest category is investing in our stock brokerage accounts. We make a goal to invest this amount into these accounts each month whether the market is doing well or not. If the market is in a bull cycle, I typically leave it in the account as cash until stocks (read: Stocks That I Own in My Portfolio)
enters a bear market.
"be greedy when others are fearful, and be fearful when others are greedy."
-Warren Buffett
As I follow the buy-and-hold strategy and consistent investing through time, we want to continue allocating a budget for investing (read: Easy Method to Investing)
Personal Consumption, 26%
Finally, we typically spend about a quarter of our monthly take-home pay on things like groceries, shopping, restaurants, transportation, and personal/miscellaneous things.
From the pie chart, the percentages may seem low. The reason for this is that by setting my budget on a tighter side, we can help us avoid purchasing unnecessary things (Read: Create a Budget, Track Everything).
"Having a tight budget helps you think twice about buying things that you may really not need"
It's like buckling your belt tighter which may cause you to not eat as much. When you start to reach the end of the month and your budget is thin, you may delay the purchase and ultimately avoid it altogether.
I know that consumer goods might give you joy temporarily, so I try to stay focused on our goal to achieve what will bring permanent joy to us which is financial independence. For our money-saving tips at home, check out: 10 Ways to Save Money at Home).
Car Payment
We do not have a car payment as we wanted to follow Dave Ramsey and many other experts' debt snowball method. This method focuses on paying off the smallest debt first and continuing to eliminate more expensive debt so that we feel like we're making progress.
In hindsight, we could have used the fund to pay down the mortgage debts with higher interest rates but either method is a personal choice and I see the value in each option.
Using Credit Cards to Save Money
Another thing to note about personal consumption is that we put almost everything on our credit cards so that we can earn credit card points which equate to more savings. (Read: How to Travel to the Maldives for Free).
As I have regretted not setting financial goals in my twenties, I want to avoid making the same mistake when I reach my forties. Additionally, as we continue to earn more, I want to keep our bootstrapped tight to not spend more but to invest more in assets that will continue to grow for you.
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