Who can relate to the feeling of payday, only to find themselves waiting for the next month's payday in a matter of minutes because it's all gone to paying bills?
So, to avoid that again this month, let's try allocating our salary using formulas!
Why is Salary Allocation Important?
Some people may not think about allocating their salary because they don't think they're particularly wasteful. But how do we know if our spending is truly "not that wasteful"?
One way, of course, is to allocate the amount of money we want to spend on certain needs. If we don't know how much we're allowed to spend in a month, we often become permissive and forget. In the end, we end up broke!
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| Monthly Salary Allocation Guide: Keep Your Finances Secure |
Well, there are several important benefits you can gain if you manage your salary properly, such as:
1. Prevent Impulsive Spending
Sometimes, if we don't know how much we can safely spend in a month, we tend to overspend because we "feel" we're not as wasteful.
However, if you have a good salary allocation, you'll know how much you have, and this can act as a brake on spending on non-essential items.
2. Helps Achieve Savings Goals
Managing your salary by making the right allocations can also be a way for you to achieve your desired goals. For example, you might allocate 20% of your salary to savings so you can go on vacation abroad once a year.
If you're disciplined with your salary allocation, you'll be able to accumulate your savings target more quickly.
3. Preparing a Retirement Fund
Salary allocation can be useful for preparing your desired financial items, from daily needs to savings to retirement funds.
This way, you'll also have more peace of mind about facing the future. In fact, if you're aiming for early retirement and financial freedom, salary allocation can help you get there faster!
4. Prepare an Emergency Fund
Managing your salary properly can also help you prepare an emergency fund. Even if you already have a savings account, an emergency fund is also necessary for unforeseen expenses.
5. Identify Financial "Leaks"
By allocating your salary, you'll also know which items are consuming the most of your salary. This way, you can review whether your spending is all about necessities or whether there are things you can save for, especially if you have a specific goal in mind.
Salary Allocation Formula
In general, salary allocation is usually divided into three categories: needs, wants, and savings. The percentages usually vary depending on your financial goals.
The most common salary allocation formula is 50-30-20. But, there are also other formulas that you can use.
1. The 50-30-20 Formula
If you're an employee without dependents and want more freedom in how you spend your money, you can manage your salary using the 50-30-20 formula.
This formula means:
You can spend 50% of your salary on basic needs, such as paying bills, daily meals, transportation, and health insurance.
You have 30% of your salary allocated for occasional pleasures, such as hanging out with friends, shopping, or other entertainment.
Save 20% of your salary for savings, an emergency fund, or investments.
Since your salary allocation is quite large, you can be more flexible with your spending if you use this formula. You get the benefits, and you also get the savings.
2. The 70-20-10 Formula
This salary allocation formula will create a sizable allocation for spending. However, it doesn't mean you can splurge.
To ensure sound financial management, the 70-20-10 salary allocation formula is more suitable for those with significant expenses. This formula is typically suitable for managing household finances for those with dependents or a family.
The 70-20-10 allocation breakdown is as follows:
70% for basic needs and fixed expenses, such as daily necessities, electricity bills, mortgage/house rental fees, children's school fees, and health insurance.
20% for savings. This can be allocated for savings, investments, or an emergency fund.
10% for situational debt payments or donations.
3. The 40-30-20-10 Formula
Now, if you have a lot of items you want to cover, the Financial Services Authority (OJK) recommends following the 40-30-20-10 salary allocation formula, which states:
40% for daily needs
30% for paying installments or debt
20% for savings or investments
10% for donations
Actually, in principle, this is similar to the 70-20-10 salary allocation formula. The difference is that the items are more specific, so hopefully, you'll be more disciplined in setting aside money for specific goals.
If you still have desires you want to fulfill, you can include them in the 10% allocation to avoid overspending on them.
Effective Salary Allocation Tips
Beyond just knowing the salary allocation formula, there are several other tips you need to follow to make your salary management efforts more effective.
Record your expenses. This is crucial so you know where your money is going. You can use an app to monitor your spending.
Separate wants from needs so you know which priorities to fulfill over short-term pleasures.
Allocate your salary for an emergency fund. Especially in these uncertain times, it's crucial to set aside some of your salary for an emergency fund.
Avoid consumer debt, such as paying off the latest cell phone just to keep up with trends. Focus on meeting your needs first.
Allocate your salary for health or life insurance, especially if you're the breadwinner and have dependents. Having life insurance will give you and your family peace of mind in facing the future. Examples of life or health insurance that you can consider are Smile Pro Infinite and Smile Medika Ultimax (SMUAX).
Regularly evaluate your salary allocation. As our needs change over time, so does our salary.
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