Here’s what I recommend for a middle-income person/family in Malaysia today (percentages based on take-home salary):
. Home Loan / Rent: 30%
. Food & Living Expenses: 20%
. Transport: 15%
. Investment & Savings: 15%
. Personal / Fun: 10%
. Giving: 10%
And here’s some further explanation of each category:
Home Loan/Rent: 30%
The “30% for housing” rule isn’t mine. It’s actually a common financial guideline used by finance professionals. The reason behind it is you don’t want too much of your salary to be stuck in loans.
Imagine having 60% of your salary disappear every month just to pay the banks. Terrible right? Especially in uncertain economic times — what happens if you touch wood lose your job?
And yes, I know in Asia we seem to be crazy about owning houses at young ages. Nothing wrong with that. But there’s also nothing wrong with renting until you can properly afford a home too.
(P.S. Over long periods of time, property prices don’t appreciate as much as you probably think. It’s only 4-5% annual growth over the past 35 years.)
Food & Living Expenses: 20%
This portion is for things you can’t live without — like groceries, soap, and your monthly Internet.
Now we get to the controversial part. How much should you spend on your vehicle? Well, I say try to keep transport costs below 15% of your take-home salary: including car loan, petrol, tolls and parking.
Does that mean you should only drive a Perodua? Maybe. You could drive a BMW too — but you’d need to be earning a lot. Because cars are really expensive in this part of the world.
BTW — if you spend less than 15% on transport — that frees up money for other things. For example, here’s a fun thought experiment: maybe drive a basic car, but have a lot more money for family holidays?
The opposite of this is also true: maintain an expensive car — and you’ll have a lot less money for everything else.
Investment & Savings: 15%
This is the part that gets you to financial independence. 15% is a nice base target to aim for, but of course — the more you save and invest — the faster you reach your financial goals. Wanna retire in 10 years? Save 70% instead.
Also, remember that these budget percentages are based on your take-home salary. Meaning for a salaried person, he/she already has another 23% (of gross salary) saved in the EPF retirement fund. That’s 11% of your own contribution and 12% from your employer.
If you think about it — that’s actually a lot. 23% (of gross) plus 15% (of take-home). Give it 30 years to grow and you’re looking at a nice amount for retirement.
P.S. if you work for yourself, because you don’t have EPF — you might wanna save more than 15%.
Personal & Fun: 10%
All work and no play makes Jack a dull boy. Don’t forget to allocate some money for you to enjoy the simple pleasures of life too. Take your partner out for a nice dinner. Book a massage. Plan a holiday.
If you’re new to budgets, you might be tempted to cut this portion out. You might think that budgets need to be communist-strict, and all money should be only for “useful things.” Don’t do that!
Making your budget overly strict — with nothing to keep it fun and enjoyable — will demotivate you. Instead, make sure you spend this “fun money” to reward yourself.
It’s important to be responsible with your money. But don’t forget to live a little.
I left this portion for last, but I recommend you pay this first.
No matter your financial situation in life, there will always be people who are less fortunate than you. Please allocate some money to help them out too.
Money may make the world go round. But kindness and mercy are what makes us human.
All copyrights for this article are reserved to DIY