Do you plan your funds only to wonder where the money went? Are you consistently having shortfalls?
Are you still broke despite your best efforts at planning your spending? Maybe, it’s time to tweak your Spending Plan.
One of the easiest ways to stay broke is to spend all you earn before you know it. No matter how much you earn, you can always put something aside.
A lot of responsibilities and commitments eat away at your paycheck. All the same, I want to encourage you to minimize lack in your life by trying an income allocation plan that worked for me. This allowed me to amass a significant amount of money with which I bought my first car paying fully in cash.
It might just be what you need to make a difference in the state of your finances. Before allocating your funds, take a critical look at the items you spend money on.
Are they all necessary expenses? Is it a need? Or, can you do without them? It is best to cut off things that don’t add value to your life.
Don’t buy anything you can’t afford. If you need credit to buy it then you can’t afford it. The best plan is to defer gratification and save towards what you want.
Doing that gives you more power over your destiny while leaving more money in your hands.
My suggested income allocation plan involves allocating your money to different categories.
- Divide your income into 7 distinct parts.
- If you earn in cash, use envelopes to split it.
- If you have a bank account create one or two sub-accounts with your bank that are tied to your primary bank account (it is a simple process).
- Focus on saving, investing, paying your bills, and living well.
- Stick to it for at least 6- 12 months and see the difference in your cash position.
How To Allocate Your Money To Each Category in 7 Distinct Parts
- Tithing – 10%
- Offerings & Charity – 5%
- Savings – 10%
- Emergency Fund – 10%
- Household – 20%
- Payment of Bills – 35%
- Investing – 10%
- TOTAL -100%
How To Allocate Your Money To Each Category
Tithing – 10%
The first thing I do any time I receive any income is to take out 10% of the total amount and give it to my church. You may wonder why I do this. I will explain.
Just like you take out an insurance policy to receive financial protection or reimbursement against losses from an insurance company as defined in Investopedia, you protect the remaining 90% and more, of your income against unnecessary losses that eat away at your money.
Tithing Principle
It is not a money-making scheme but a scriptural principle laid down in Malachi 3:8-12 (NLT) where a symbiotic relationship is formed between the tither and the Creator of the universe, God.
As His child, you need to prosper and live well, which is also one of His life goals for you.
In exchange for making you thrive God needs your help to fund His church, which is a not-for-profit organization, so His full-time Ministers, who pursued their spiritual calling can get paid.
Your tithe should go to your local church. This is to ensure that you’re emotionally connected to the recipients of your tithe, who are the Ministers you know.
You know them, their wives and children. So your tithe directly impacts the Ministers who devote all their time to providing spiritual leadership and pastoral help to you.
Your tithe ensures that these husbands and daddies get paid so they can put a roof over the heads of their families, put food on their table, and clothes on their backs, and also pay tuition for children in school.
This allows them to also live comfortably with financial stability without compromising their spiritual calling.
As you tithe, God ensures you thrive. You will not lack any good thing, which gives you peace.
It is on record that many billionaires, like John D. Rockefeller according to Forbes, also tithed their income ever before they became rich.
2. Offerings & Charity – 5%
Charitable giving is something most people know about and do. I highly recommend keeping something apart so you can help others.
You can decide the percentage that works for you. For me, what worked was keeping an amount aside to meet the needs of people who came directly to me for assistance.
I found it disheartening if I could not at least assist, no matter how small. There was the story of a policeman who arrested a shoplifter.
The woman only took a crate of eggs. She was crying saying she was not a thief but her children needed food and she had no money.
The Officer got teary, helped her get more groceries, paid for them, and took her home. He got there and found little children, who were waiting for their mama to come back with food.
Imagine if the Officer had nothing to give? It would have broken his heart.
As a counselor, at times I meet people who are down and out. You can’t let them go empty-handed if they are in need, so I strive as much as possible to keep something no matter how small to give someone a little hope.
3. Savings – 10%
For me saving is sacrosanct. You just have to save. I understand it can be quite difficult doing that if the funds are not enough.
What I do is imagine that what I have to live on is the amount left after tithe, savings, and investing.
Though it can be difficult squeezing yourself tight, I found out that you feel empowered when you do put something aside.
Truth be told, you are not always in control of every expense that comes your way. Just like the story of the police officer above you can come across situations, where you need to make un-budgeted expenses.
The recipe for financial disaster is to spend more than you earn, which is something having a credit card makes you do.
Maybe at this point, I can also tell you that I don’t keep a credit card. Never applied for one. I always use Debit Cards, which by the way are tied to money you have.
This is a true reflection of your financial state. Anything more than that, you cannot afford and should not buy until you can.
One thing that allows you to do that is your savings. So it is a pretty powerful thing to save.
It minimizes the stress of debt and keeps more money in your pocket. A strategy I use is to deduct at the source. Once money comes in before you spend you calculate 10% of the amount and move it to another account.
For salary earners, you can always set up automatic withdrawals to transfer into your savings account once your paycheck comes in.
4. Emergency Fund – 10%
An emergency fund is a must-have. You need an emergency fund. It is similar to the savings above, although not the same. It is a contingency that cushions the adverse effect of any sudden loss in income.
It is advisable you have at least 6 months worth of wages put aside. I suggest however you have more than that. Preferably keep as much as 10% of the money available to you consistently aside over time.
If you need extra cash for an unplanned expenditure, it can act as private funds you can borrow from and build back again. Keep it as a float, making sure the amount is never below a year’s living expenses.
It is perhaps one of the most important funds you need to have. I pray you do not have to use it but I advise that you have it.
Life happens and you need to be prepared in case it does.
5. Household – 20%
This is where you provide for your groceries, occasional treats, daily purchases, laundry, personal care products, clothes, and cash at hand.
You may ask why “cash at hand”? Yes, money for all these household items will not be expensed in one day. It should be spread across the period in which the particular funds are to be used pending the receipt of the next income.
The idea is to be liquid at all times. What keeps you broke is the lack of cash flow and this leads to lack when you cannot replenish necessary consumables, as and when due.
To maintain tight control over this allocation, I suggest you make a standard list of all items your household requires within the period in question. This will be the standard list for re-stocking.
Always shop with a list to keep yourself in line. Doing that will ensure you don’t overspend. Read my post on How To Avoid Overspending by Taking These 4 Steps.
Keeping your expenditure within the allocated amount will ensure you don’t dip your hands into your savings or emergency fund.
6. Payment of Bills – 35%
Everything from taxes, rent, debt repayment, insurance premiums, gas, electricity, water, and every other bill peculiar to your household will be paid from here.
You will also have to make a list of every expense that you always make. Remember the number of periodic payments will determine how much you allocate here.
It could be more or less. It depends on your unique circumstances. You may wish to adopt this allocation formula or use it purely as a guide.
Just be sure you capture all expenses, so you don’t get surprised by any.
7. Investing – 10%
Last but not least is your investment allocation. You have to grow your money.
The interest on savings is very small but still worth it as compound interest will ensure steady growth of your funds over time.
However, investing involves a more aggressive approach to growing your wealth. It is best you first of all educate yourself thoroughly before you invest a dime of your money with anyone.
Be sure you understand what different investment products are available. Do what you understand. Also, understand the kind of person you are.
This is very important, so you know the kind of investment strategy that suits you. While there are investment apps you can start with, with very low amounts, first study and understand investments.
So you might just build up your funds first while you educate yourself. You might also tweak the percentage amount you want to put aside here.
My advice is to start small and then grow your portfolio gradually as you gain more understanding about the investment products, and yourself.
Also, find out if you are good with money by taking this financial quiz.
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