In a world without bills, we would all be able to spend our salaries anyway we pleased. But unfortunately, this isn't a reality for most of us. And even if we aim to keep a simple life with few expenses, there's usually no way around rent, mortgage, utilities and food. But even if you can't control certain expenses, you can control how you use your salary.
The way you use or spend your salary has a tremendous impact on your personal finances. You may observe someone who "has it together financially" and question their secret. This person might have zero credit card debt, money in the bank and few financial worries. However, being financially happy doesn't necessarily suggest that this person earns a high salary. The truth is, he might earn the same amount as you, or less. But unlike you, this person has mastered the best way to use his salary.
In all likelihood, he doesn't splurge on items he can't afford, or go into debt trying to keep up with his friends. He lives within his means; and as a result, there's plenty of room in his budget for covering expenses and saving money.
So, what is the best way to use your salary? Here are four tips for financial success.
The amount you pay in taxes will vary depending on how much you earn -- either 10%, 15%, 25%, 28% and 33%+ for high earners. As an employee, your employer automatically deducts income taxes from your paycheck. But if you're self-employed, you'll need to estimate your yearly income and set aside tax money according to your tax bracket. For example, if you're single and your business profits $50,000, you'll need to save 25% of your income for taxes.
#2. Housing and other debts
Housing is one of your largest monthly expenses, followed by your auto loan payment. And as your biggest expense, it's important that you spend a reasonable amount whether you're renting or buying.
Ideally, you should only spend roughly 28% to 30% of your gross monthly income on housing. Therefore, if you're grossing $3,000 a month, your house payment should not exceed $900. In addition to your housing, other debt payments should not exceed 10% of your income. This includes minimum payments for auto loans, student loans, credit cards and other debts.
#3. Savings and investments
All of your salary should not go to bills. If it does, this is a tell-tale sign of living above your means, and you'll need to reduce your expenditures. As a rule of thumb, set aside at least 15% of your income for savings and investments. For example, you might contribute 5% of your income to an employee-sponsored 401(k) plan or an individual retirement account, and 10% of your income to an emergency fund. If necessary, start with smaller percentages and gradually increase your contributions.
#4. Living expenses and other costs
Living expenses account for the remaining 20% of your salary. This includes anything from utilities, groceries, insurance, fuel and miscellaneous costs like shopping. Therefore, if you're earning $3,000 a month, living expenses and other costs should not exceed $600 a month.
How do you keep your monthly spending on track?
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