Oct 13, 2008

3 Simple Schemes to Split up Your Paycheck

How much should you use to pay off debt? How much should you save? What other categories should you consider?

As with everything related to Personal Finance, there are many ways of doing it and many much more complicated than any of these three. We're going for simple maths here, simple life, simple savings. And the best thing is, they're all likely to work for you, you just need to decide how complicated you want to get.

In my previous article I mentioned that you should Pay Yourself First. I'm currently putting away 10% of my paycheck into my Emergency Fund. Luckily for me, I have no other debt other than my mortgage so my plan is to increase this 10% over the coming years to 20% or more ... and that's exactly what this first scheme is.

The Simplest of Them All

Put 20% of your take-home pay in Savings

That's it, it's pretty simple. Savings in this case, means anything from an Emergency Fund, your retirement fund, maybe stocks or even an added payment on your house. Of course, if you have any debt (other than your mortgage) you should put this against your debt first. Savings can come later once those high interest debts are gone.

The Next Level

Spend 50% on Needs, 30% on Wants and put 20% into Savings

Not much different to the one above is it? It's just splitting up the rest of your pay a little bit. Of course, everyone's circumstances differ so it would just be a case of fine-tuning the percentage amount for each category until you find the one that's right for you. I personally think that 30% Wants is a bit too high but again, it's all dependent on your other categories.

The Final Simple Scheme

60% Needs, 10% Retirement, 10% Irregular Expenses, 10% Savings, 10% Fun

Yet again, we're splitting up the categories but if you look closely, you're not too far off either of the previous two anyway. For example 10% Retirement + 10% Savings is almost equivalent to the 20% from the first scheme. Currently I'm putting 5% into my Freedom Fund (Irregular Expenses) but I hope to increase that. I will also soon start socking away more cash into my house too. I hope that in 2 months time when I make my first real budget that my Needs are lower than 60%.

Which One is Right for Me?

All of them are right and they'll all do the job to one degree or another. Doing your sums makes all the difference and luckily the maths are fairly straightforward here. I'd say if your savings scheme is remotely like any of these then you're doing okay.

On the other hand, if your savings scheme is a lot less than these, or is even non-existent, then you'll have to start seriously looking at paying yourself first and starting those savings.

Anyone have any other schemes they are using? Any that they are planning to try?

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