How much of my salary should I spend?
Everyone earns different salaries, has different expenses, as well as varying lifestyle choices, however, it is important for all individuals to understand their cost of living and to formulate a budget that works well for them. The following article will outline some useful tips and some considerations you can take into account when determining how much of your salary you should spend.
Understanding your income
The first step to budgeting and understanding your outgoings is to start with a clear idea of your income. It is important to know how much you are earning, where it is coming from and how often you are receiving it. It is also critical that individuals are across the difference between gross and net income. Gross income refers to your baseline salary, whereas net income includes what you actually take home after deductions such as tax. This could also be boosted through other income sources such as a side hustle or rental income from an investment property. Net income is important as it provides you with a clear figure of how much you have to spend on your cost of living and any other expenditure you may have.
Understanding your expenses
A popular rule of thumb that many people use is the 50/30/20 guide. This allocated your net income into three distinct spending goals
- 50% of your net income is for essential living expenses such as food, rent/mortgage repayments, bills, and other non-negotiables which must be paid.
- 30% of your net income can be for discretionary spending or ‘fun money’ this is for items such as clothes, dining out or other hobbies/activities that you enjoy.
- 20% of your net income can be set aside for savings, investing, paying off debt or boosting your super. Although this is the smallest allocation, putting this money aside can make a big difference in the long run.
It is also important to remember that this guide is just that, a guide and therefore it will not be suitable or achievable for everyone. It should also be noted that spending is likely to fluctuate across different periods of your life, however, having a strategy in place can help to reduce the anxiety many people feel about their budget and spending.
Let’s do an example:
Assuming that your gross salary from work is $100,000 p.a. after tax ($22,967) and the Medicare levy ($2,000) have been deducted, you will take home a net income of $75,033 p.a. Assuming you have no other sources of income, this means that you will have approximately $6,252.75 per month in your pocket. This can be broken down using the 50/30/20 rule which means that per month you have $3,126.37 to spend on your non-negotiable living expenses, $1,875.82 for fun money as well as $1,250.55 for saving, investing or personal debt.
How to make budgeting easier
Budgeting often feels like a chore, however, there are ways to structure your finances so that budgeting is automatic and becomes stress-free. After you have established your budget and implemented a strategy that works for you, you can set up separate bank accounts for each of the buckets discussed above. This can include one account for bills, expenses, and other spending within the 50% allocation which can help to ensure that these are never missed and there is always adequate cash for your essential needs. Individuals may also wish to have a separate account for their discretionary spending as well as one for making regular deposits into their super or an investment portfolio. It is also a good idea to have a high-interest savings account for an emergency fund. To read more about why you need an emergency fund and how to set one up, click here.
Ways to minimise your taxable income
There are also ways to minimise your taxable income so that more money ends up in your pocket instead of the ATO’s. One way is through salary sacrificing which involves asking your employer to pay some of your salary into your super in addition to the Superannuation Guarantee of 10.5%. As this money is taken from your pre-tax earnings this means it is generally taxed at 15% instead of your marginal rate which is likely to be considerably higher. In the example above, the marginal tax rate was 32.5%, and therefore salary sacrificing could provide you with a tax saving of up to 17.5%! It is important to note that there are limits on how much you can contribute to super under this tax concession which currently stands at $27,500 p.a.
Getting professional advice can help to alleviate the stress that people feel around their finances as well as improve the performance of your investment or super portfolio. A study by Russell Investments suggests that this can add up to 5.2% of growth per year, compared to going at it alone. This is where a financial adviser can guide you and simplify the process so that you feel in control and on top of your financial position. To book a 20-minute complimentary meeting with an EPG Wealth adviser, simply click here and select a time that works for you.