People have money left over at the end of each month??

It’s not at all unusual to have no money left over at the end of the month. By the time payday comes around, many of our accounts are in dire need of a replenish. Most of us live like this and it’s really concerning. More than income or investment returns, your personal saving rate is the biggest factor in building financial security.

According to the rule, you should be spending no more than 43 percent of your before-tax income on all your debt payments. So, if your gross income per month is $4,000, your total debt including mortgage, auto loans, credit card payments, and student loans should be less than $1,720.

Let’s discuss in detail as to where the expenses can be managed to increase the percentage of that band. Or, how to efficiently park the money in savings to get maximum yields after settling all essential and non-essential expenses.

Order of priorities – Money left over doesn’t mean you have to spend it.

If you have no savings account and you’re paying the minimum on your credit card balances, you’re heading towards a non-sustainable lifestyle. Possibly even bankruptcy, eviction, and other major life hazards. Any extra expense like car trouble, interruption in income, medical emergency, marriage, etc. can throw a big monkey wrench in your budget.

So, in order of priorities, this is where any money left over should be going:

  • Inevitably, pay off your credit card balance (if you are carrying a balance)
  • Start an emergency fund with a goal of 3 – 6 months of living expenses
  • Start a retirement account with the goal of saving 10% of your income
  • Then you can start saving for intermediate goals: a home, a cruise, or your kids’ college fund.

Essential and Non-Essential Expenses.

Debt-to-Income Ratio

Most households spend a considerable portion of their housing budget on their mortgage which includes charges for both the principal on your loan and the interest. If you have an escrow account associated with your mortgage, your payment may also include charges for property taxes, home-owners, and title insurance.

Homeowners’ Association Fees

Many residential societies require you to be a member of a property association. Homeowners associations charge a monthly fee that pays for maintenance, landscaping and upkeep of the community and common areas. Common areas usually include areas like swimming pools, parks or parking spaces.

Hidden Costs of Owning a Home

You will also need to cover the cost of maintenance and repairs. A good rule on how much you should spend annually is 1 to 2 percent of your home’s value. You should also plan an emergency fund to pay for unexpected expenses, like a car-repair or plumbing issues.

Discretionary Income

Discretionary income is what is left over from disposable income after the income-earner pays for fixed essential expenses like: Rent/mortgage, transportation, food, utilities, insurance and other essential costs

For most consumers, discretionary income gets depleted first when a pay cut happens. For example, if a person makes $4,000 per month after taxes and has $2,000 in essential costs, he has $2,000 in monthly discretionary income. If his pay gets cut to $3,000 per month, he can still meet his essential costs but only has $1,000 left over in discretionary income.

Whether or not you choose to budget, at least find out how much you’re gaining, or losing, every month.

What is 50/30/20 Budget Rule?

It’s hard to define how much should be left over each month after paying all your personal finances as they are different for everyone. But to generalize it, the 50/20/30 rule is applicable to most of us. According to this rule, up to 50% of your income goes to fixed spending, 20% would go to savings. The last 30% should go to other expenses.

For example, you earn $1,200 every two weeks. After all taxes, it’s $1,000. Your savings goal should be 20 percent of net (after-tax) income or $200 from every paycheck.

On the other hand, if saving 20 percent of your income seems to be implausible, or even impossible at the moment, don’t feel frustrated. Saving something is better than nothing. If you are presently not able to make up to 20% for savings, plan and start from a smaller amount and when the figures in your account show up enough, increase the savings accordingly.

So, how much money left over completely depends on the situation.

The answer is, it completely depends on the person’s situation. We’ve given you some ways to asses, and even improve your discretionary income. The reality is, many people have little to nothing left over each month. Some people choose to allocate all of their money to a specific use, even if that is savings. We’ve known people who make $40k a year manage their money expertly, and enjoy a healthy financial lifestyle. We’ve also known people making six figures that could barely make it to their next paycheck.

The better you manage your money, no matter what you make, the better chance to have money left over every month.

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