If you are looking for a budget that will give adequate room for fun money, then the Balanced Money Formula is the perfect budgeting system for you. If savings is your goal, then the 60% Solution is perfect budgeting system for you.
Today we will look at a budgeting system that stand’s between the Balanced Money Formula and the 60% Solution. This budgeting system breaks down to detail where each shilling you have earned goes to.
You start this by looking at your net income (no cheating using gross). Your budget will be structured into 6 categories: Rent/Mortgage, Discretionary expenditures, Transport and Food expenses, Investing money and savings. You will then allocate your net income as follows to each category:
Let’s put the above into perspective:
Antonio earns KES 35,000 as net income, below is how he will allocate this amount in his budget:
Home
Finance experts recommend that the ideal maximum amount you should pay as rent should be no more than 30 percent of your net income. Paying more would mean you are living in a house that’s above your means.
Based on the fact that cost of housing in Nairobi is distributed based on:
- High income areas
- Middle income areas
- Low income areas
What you earn will determine where you best fit.
The maximum amount Antonio should spend on rent should be no more than KES 10,500. Such an amount can get him a bed sitter apartment around Dagoreti Corner or a 2 bedroom house in Rongai.
Transport and Food
20 percent of your net income goes to food and transport expenses. On average, Antonio will have to work with KES 7,000 in this category. With the current continuous rise in food prices and high transportation costs, KES7,000 might not be enough meaning Antonio has to somehow cut on his food and transport expenses in order to make the KES 7,000 work.
Discretionary Expenditure
This refers to your variable costs. They may include airtime money, recreation, entertainment, etc. like the transport and food category, Antonio also to work with KES 7,000. This category is much easier to cut costs in since it bears expenses you can do without.
Savings, Investing, Charity
30% of Antonio’s net income will be allocated to his savings, investment and charity category. This means Antonio had to work with KES 3,500 in each of the above categories.
Saving 3,500 each month will get him a total of KES 42,000 in savings in 12 months. This is equivalent to about 4 months’ rent if Antonio lives in a KES 10,500 apartment. This is a recommended amount of cautionary money if Antonio is to lose his job.