Financial Security: Principles of Minimalist Budgeting
As of December 2016, the average Australian household is thousands of dollars in debt.
And, on top of that, one in three Australians don’t have savings for retirement.
The good news though is if you fall into one (or both) of these figures, you can get out on top.
Yes, it will take discipline. And it will take time to form new financial habits.
But, it is possible.
In order to undertake this, you’ll need to learn how to become a minimalist.
Read on to learn how to become one and, in doing so, regain your financial freedom.
Practice the 50/20/30 rule
Basically, the 50/20/30 rule tells you what percentage of income goes into what pile: necessary expenses, savings, and personal expenses.
Necessary expenses: 50%
50% of your income goes to the necessary expenses pile. When we say necessary expenses, we mean the minimum living expenses needed to survive.
Which are food, shelter, utilities, transportation, and health insurance.
No, cable TV does not count. Nor does your expensive cell phone bill.
Savings: 20%
You’ll then want to put 20% of your income to your savings pile. This pile isn’t strictly for retirement; it includes paying off outstanding debt as well as money for your emergency fund.
When it comes to emergency funds, ideally aim for three to six months of your necessary living expenses.
That way, should you get let go or need to quit your job to take care of a sick parent—emergencies—you’ll have a financial cushion during that time.
Personal expenses: 30%
And lastly, 30% of your incomes goes to your personal expenses. This includes cell phone bill, cable TV, gym membership, concert tickets, restaurants, you name it.
Pretty much, anything that increases the quality of your life.
However, should you find yourself in a financial predicament, this is the first pile to cut. (Your necessary expenses is the last. In which case, we’d assume you’re living with a relative or friend.)
Exceptions to the 50/20/30 rule
This rule may not nicely fit into every household’s or individual’s financial situation. But it’s worth following.
Like we said, if you’re in a financial bind, you’ll want to start decreasing your personal expenses pile.
If you haven’t saved for retirement and are approaching your mid-forties to fifties, you may want to put a higher percentage of your income into your savings pile.
And, if you’re in your twenties and thirties, it’s a good mentality that you don’t exceed 30% in personal expenses.
The type of financial habits you form now will likely map out your finances for a good portion of your life. (Not that you can’t change them if they turn out to be unhealthy.)
But a higher percentage of my income goes to necessary living expenses. 50% is not enough.
With a mortgage, car payment, car insurance, hefty grocery expenses, utility bills, and your child’s college tuition, 50% may not seem like enough.
If you’re making $50,000 per year, $25,000 sounds hard to live off of, if not unrealistic.
However, it is possible. It just means you have to downsize your necessary living expenses to the minimum.
Especially in western society, we believe we need that $40,000 car, and that our cell phone is our lifeline. Plus, who lives without WiFi in their homes?
The thing is, when you think about it, your $40,000 car and cell phone and WiFi bills are extra.
You can trade your car in and get something cheaper. Or, if your work is close by and the area is safe, why not bike to work?
Like with your car, trade in your phone for a cheaper one.
And, for WiFi, go to the library or a cafe that has it.
If these ideas don’t sound good to you and you absolutely need these things in your life, look into ways to earn some extra money.
So that you raise your income, increasing the dollar amount that goes into your necessary living expenses pile. (Still, keep the percentage at 50%.)
Ask yourself this question
Besides the 50/30/20 rule, how to become a minimalist requires you to ask the hard questions.
An important (if not the most important) question is this…
Is this insert-item/service-you-want-to-buy worth insert-number-of-hours of work?
So, let’s say you’re considering buying a frappuccino with two-three add-ons. The drink is going to come out to $8.
Suppose you make $16 an hour.
You’d ask yourself, is this frappuccino worth half an hour of work?
Or, you want to buy concert tickets. The tickets cost $60 per ticket, which then comes out to $120 (two tickets).
You’d say, are these concert tickets worth seven and a half hours of work? (That’s almost a standard full day of work.)
Perhaps they are. Perhaps they aren’t.
Make sure you ask this question every time you’re considering buying something.
Why is it important to ask this question?
By making a habit of asking this question, you’re becoming conscious of your spending.
Also, you’re evaluating a product or service not based on dollar amount but on the amount of time you spend earning that dollar amount.
This forces your mind to reflect on the hard work you did last week. And it starts to get personal. Because you’re remembering last Monday, where you spent all day writing that report. Are those concert tickets worth that experience?
Essentially, you’re taking it from the impersonal (dollar amount) to personal (your valuable time).
Cut your credit cards
This is an age-old practice. But since the average American has roughly 4 credit cards, many people aren’t adhering to it.
(Before you do cut your cards, look into if not using your credit cards at all will hurt your credit score.)
(If it does affect your score, really make it a point to consciously ask that important question we mentioned earlier.) If it doesn’t, get those scissors out and cut away.
Doing this will physically force you to not rack up more credit card debt.
After reading this article, you should now know how to become a minimalist. And be on your way to getting there.
Do you know how to become a minimalist?
Let us know! Plus, if you have further questions on how to become a minimalist, contact us.
And, while you’re at it, learn how to create an emergency cash fund by visiting our blog.
Disclaimer: Please be aware that Cigno Loans’ articles do not replace advice from an accountant or financial advisor. All information provided is intended to be used as a guide only, as it does not take into account your personal financial situation or needs. If you require assistance, it is recommended that you consult a licensed financial or tax advisor.