Have you ever felt like your debts are piling up even though you’re working harder than ever to bring in more income? If you want to start turning things around, begin by getting to know how much you should spend on these significant expenses.
According to 2018 research, most affluent households allocate an average of 20% of their spending to transportation-related expenses. This makes it the largest area of spending, aside from actual housing costs.
When you decide that it’s time to buy a car, be sure to consider all the associated additional costs, such as insurance, gas, and parking. After taking these into account, you can find that a mid-range affordable brand such as Volkswagen makes more sense, and find the best vehicle finance options for you so that you don’t go over-budget.
Buying a home will probably be the most significant expense of your life. As a rule of thumb, it’s recommended to spend around one-third of your income on housing. The numbers vary depending on your situation – if you are relatively debt-free, for instance, you can afford spending up to 41% of household income on housing.
Note that similar numbers apply even if you’re currently renting. So if you’d like to be able to set aside some money, see to it that your expenses for rent and utilities are around a third of your total income.
When you have sufficient resources, pursuing higher education can provide you a significant return on investment. Statistics show that graduates with successive degrees have better job opportunities compared to college graduates, who, in turn, have better prospects compared to non-graduates.
Better employment also leads to other intangible benefits, such as improved fulfillment and health. Just be sure to take on a reasonable amount of student debt, if necessary, in line with the additional income you expect to make.
Another oft-cited rule of thumb is that you should invest 10% of your income. However, different financial experts might advise you to invest more, such as 15-20%. The mode of investment can also vary, from a typical low-yield savings account to stocks, bonds, and other options.
Whether you set aside 10% or more of your household income to invest, and in what form, should be based on your ability to learn and become actively involved, as much as on what you can afford. For instance, getting into real estate will require more personal involvement and commitment than investing in mutual funds.
One thing that’s frequently overlooked by single professionals is the allocation of income to life insurance. You can get health-related benefits covered in part or in full by your employer. Still, if you are providing for dependents, then it’s vital to set aside a portion of your resources to additional life insurance.
Cash-value policies can offer you an additional investment option as the money is invested into index funds, giving you periodic returns. Insurance also helps to settle any outstanding debt you might have, and replace the income that would be lost to your dependents in the event of your death. An estimate of 5-6% of your income is a good starting point, but in the end, the policy amount you should get will depend on your insurance needs.
When you consider all these expenses, it can feel like you don’t have a lot of flexibility, but making things work within your actual budget is the key to getting – and staying – out of debt in the long term.