Here's How Much of Your Income Should Go Toward Necessities, According to Ramit Sethi

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  • When your necessities take up too much of your income, it can put you in a difficult financial position.
  • Ramit Sethi recommends spending 50% to 60% of your take-home pay on fixed costs.

If you follow his advice, you'll have plenty of money left to pursue financial goals and spend guilt-free.

Your necessities, often called fixed costs, are the expenses you have to pay. Rent, groceries, utilities, and debt all fall into this category.

These are the most important expenses, because you can't just stop paying them at any time. If you're trying to save more money, you could cut out dining at restaurants or going to the movies. You can't do that with things like your home or car payment, which is why you don't want them to take up too much of your income.

So, how much of your income should you spend on necessities? Ramit Sethi, who provides personal finance advice in his book and website, says 50% to 60% of your take-home pay should go to fixed costs. And he has a spending plan he recommends to make it easy to manage your money.

How to allocate your income

Sethi advises everyone to make what he calls a conscious spending plan. The name is because you're consciously choosing how to spend your money. This plan involves dividing your take-home pay into four buckets as follows:

  • 50% to 60% for your fixed costs: As we went over earlier, fixed costs are your essentials.
  • 10% for your investments: These include your 401(k), IRA, online brokerage account, and any other investments you have.
  • 5% to 10% for your savings goals: Your emergency fund, a down payment on a home, and other items you want to save toward are part of this category.
  • 20% to 35% for guilt-free spending: This category is your fun money, and it covers anything that's a want, not a need. Examples include going out for meals, new clothes, and entertainment spending.

One of the big benefits of this plan is its simplicity. You don't need a complex budgeting system where you log every single transaction and analyze things down to the dollar. Instead, you add up your spending and see if it fits into those guidelines.

What to do if you're overspending on necessities

Ideally, you'll do the math and find that fixed costs take up 60% or less of your take-home pay. But don't feel bad if that's not the case for you. Plenty of people spend more on necessities, especially after this year's cost-of-living crisis. There are a couple of ways to work around this.

To start, adjust the spending plan to fit your current income and fixed costs. If you spend 80% of your income on essential expenses, use that last 20% for investments, savings goals, and guilt-free spending. For example, you could put 5% toward investments, 10% toward your savings, and 5% toward guilt-free spending. Try to at least have something in each category so that you're not neglecting any area.

That gives you a workable solution in the here and now. Going forward, look for ways to reduce your fixed costs and/or increase your income. Here are a few ways to do this:

Depending on your financial situation, spending 50% to 60% on necessities could just take a few adjustments, or you might need to make it a long-term goal. Either way, it's a good target to aim for. When you aren't overspending on the essentials, you won't have trouble making ends meet. It will also leave you with enough disposable income to build wealth, save money, and have some fun money, too.

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