What do you do with your take-home pay? Spend it all? Save as much as you can? No matter where you are in life, it can be a challenge to strike the right balance between spending and saving.
But it's important to find the right balance for you. And that balance will change throughout your life as your goals and your situation change. Luckily, there's a simple equation you can use to help you stay on track to reach your goals.
Your own personal equation: the basics + fun + dreams
Your equation will be how you find your own personal balance. It will help you manage your finances without feeling like you're depriving yourself of anything. The 3 variables in the equation represent different types of expenses in your budget.
Your recurring expenses. They include:
In a nutshell, this is what it costs for you to maintain your lifestyle. These numbers aren't the same for everyone. For example, it costs considerably more to own your own home than to share an apartment with roommates.
A good meal with friends, a hot yoga membership or that must-have piece from your favourite designer--everyone needs to treat themselves sometimes. And that's totally okay (as long as it's in your budget)!
Once you've decided how you plan to treat yourself and what you can afford, you'll be able to enjoy yourself without having to worry about how you'll pay the bill.
Dreaming about the future is how you start building one! And for all of your plans, long-term or short, you need to save. Whether it's going on a trip, starting a business, spending a semester abroad or even going back to school, you just need to make room for it to happen. If it's part of your equation, you'll get in the habit of saving.
How important is that goal to you? And how much will it cost? If it's your #1 priority, you might decide to spend less on going out so you can reach your goal more quickly.
Everyone has their own equation
Now, let's create yours:
- Make your budget. Here, you don't necessarily want to calculate your expenses down to the penny. You just want a general idea of how much you spend, including your recurring expenses.
- Decide what you can spend on non-essential expenses that let you enjoy life (going out with friends, new clothes, etc.).
- Establish your ambitions and your goals. If you want to own your own home sometime soon, you'll need to make room for savings by cutting back on some recurring costs, like housing or transportation, or your fun budget.
The personal equation for a young professional who wants to buy a condo might look something like this: 45% (basics) + 20% (fun) + 35% (dreams). A student living with roommates, on the other hand, might want to spend a little more on the here and now: 50% (basics) + 40% (fun) + 10% (dreams).
There's no one-size-fits-all equation. The important thing is to make choices that fit your lifestyle to strike a healthy financial balance and gain financial independence.